RBA holds interest rates unchanged

A perceived lack of easing bias has pushed the Aussie above US74 cents and weighed on stocks.

The Reserve Bank has sat on its hands today in the wake of its controversial, budget-day interest rate cut in May.

The board kept Australia’s official interest rate at 1.75 per cent today, as expected, with investors poring over detail of Governor Glenn Stevens’ statement.

The primary focus was the potential for the reintroduction of an official easing bias in the statement, but the RBA opted to keep its cards close to its chest on the outlook.

“Taking account of the available information, and having eased monetary policy at its May meeting, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” Mr Stevens said.

In the lead-up to the May move the RBA had expressed a willingness to cut rates as “continued low inflation would provide scope for easier policy”. Such comments were not included in today’s policy statement.

“The Reserve Bank has maintained a ‘neutral stance’ – indicating that policymakers will assess more information before deciding the next move on rates,” CommSec chief economist Craig James said.

Capital Economics Australia and New Zealand chief economist Paul Dales said the lack of a clear easing signal meant another cut in the near-term was “a bit less likely”, but added it was dangerous to read too much into muted commentary.

“It’s possible that, since cutting interest rates in May and publishing in the subsequent Statement on Monetary Policy, the bank has become less worried about the inflation outlook,” he said.

“[However], it’s more likely that the RBA just doesn’t want to commit when it is in uncharted waters.

“This might explain why the policy statement was particularly bland and, at just 412 words, was the shortest in six months.”

Both Mr Dales and Mr James said their respective firms had retained their forecasts for a cash rate reduction of 25 basis points at the August meeting.

The Australian dollar jumped on the limited forward guidance, with investors trimming their bets on a move in August, widely seen as a 50-50 proposition prior to today’s meeting.

At 3.30pm (AEST), the local unit traded at a one-month high of US74.26c, up from US73.64c just ahead of the release.

It is the first time the local currency has traded above US74c since the May 6 rate cut.

The lack of an easing bias also weighed on stocks, with gains of 0.6 per cent sliced to a more modest 0.1 per cent lift.

Futures markets are now only pricing in a 41.2 per cent chance of a rate cut in August, against a 51.9 per cent chance immediately ahead of the policy update.

The prospect of a July move is seen as a one-in-five chance, with investors widely expecting the RBA to wait on July 27 inflation numbers before seriously weighing another cut.

“On balance rates still have scope to fall,” CommSec’s Mr James said.

“It all depends on the Reserve Bank’s assessment on how fast the economy can grow without generating inflation above the upper end of the 2-3 per cent target band.”

A surprisingly sharp fall in annual inflation to 1.3 per cent — below the RBA’s 2-3 target — had last month prompted the RBA to cut interest rates to a new record low.

Again the Reserve Bank made note of low inflation rates in its statement, suggesting the weakness will persist through 2016 and 2017.

“Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” Mr Stevens said.

Such comments leave the door open to a rate cut later this year.

However, the recent resurgence in house prices and reports of stronger economic growth since the last board meeting mean mortgage holders might have to wait a little longer for their next interest rate cut.

The RBA took particular note of the recent uplift in property prices, just one month after it said “price pressures [had] tended to abate”, a key factor in its decision to proceed with a rate cut last month.

However, the central bank also saw risks on the horizon, briefly discussing the risk to apartment prices.

“Dwelling prices have begun to rise again recently,” Mr Stevens said.

“But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”

The RBA has previously warned of the risk of an apartment supply glut, but has never spelled this out in its monthly policy statement.

The comments come after dwelling prices rose 3 per cent and 1.6 per cent in Sydney and Melbourne, respectively, in May.

The update also follows on the heels of the March national accounts showing Australia’s growth rate jumped to an above-trend 3.1 per cent on the back of a burst of commodity exports and continued strength in home building and consumer spending.

“Recent data suggest overall growth is continuing, despite a very large decline in business investment,” Mr Stevens said.

“Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend.”

The RBA said the transition away from resources-led growth had been aided by the weaker Australian dollar and a rise in business credit.

“These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this,” Mr Stevens said.

He added the labour market had shown mixed signals over recent months, but the overall picture still pointed to “continued expansion of employment” this year.

All of the economists surveyed by Bloomberg expected the RBA to keep rates on hold today but on average they expect one further cut by the end of the year, with a few major investment houses, including JP Morgan and Macquarie Bank, expecting a cash rate of 1 per cent within a year’s time.

While the US jobs market generated fewer than 40,000 jobs in May — barely more than a good month in Australia, which is less than a 12th the size — the US unemployment rate fell to 4.7 per cent, as swathes of Americans dropped out of the jobs market. Australia’s unemployment rate has tracked at 5.7 per cent for the past two months, where it is expected to remain.