The Reserve Bank of Australia has kept interest rates on hold at record lows for the 11th consecutive month.
Despite reports of inflation sitting at the RBA’s top level, the cash rate has remained unchanged with uncertainty remaining over the economic outlook.
The statement released by Reserve Bank Governor Glenn Stevens suggests the RBA is concerned about the growth outlook with the high Australian dollar and low consumer confidence.
After the announcement the Australian dollar hit a near three-month high. At 1435 AEST, the currency was worth 94.51 US cents, up from 94.17 US cents shortly before the RBA’s decision was announced on Tuesday.
The spike pushed the dollar to its highest level since April 10.
Mr Stevens repeated previous claims that the most prudent course is likely to be a period of stability in interest rates”.
He said monetary policy was “appropriately” set to encourage growth and keep inflation within the target range.
“Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time.”
While there has been some improvement in the labor market, Mr Stevens said it would be “some time yet before unemployment declines consistently”, while growth in wages had declined noticeably.
He said while recent data in Australia had indicated firmer growth around the turn of the year, it was mainly due to strong resource exports.
The bank flagged moderate growth in consumer demand, a “strong expansion in housing construction”, but a decline in resource sector investment.
At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent – http://t.co/RQ8YvnKOUc
— RBA (@RBAInfo) July 1, 2014
JP Morgan economist Ben Jarman said the RBA had repeated the same themes as previous months, using slightly different language.
Concerns about economic growth expressed in the June meeting minutes were absent from the July statement, he said.
“The minutes from the last meeting did sound more dovish with concerns about the (economy) rebalancing and that falling short of expectations, but you don’t get much sense of that in today’s statement,” Mr Jarman said.
“There’s been a bit of a change in the language around the exchange rate, which is not doing what the economy wants.
“But for those who were looking for the RBA to go a bit harder on the currency language, they haven’t really delivered that.
“They’ve really said the same thing but with refreshed wording.”
RBC Capital Markets head of economics Su-Lin Ong said it’s very clear that the RBA’s cash rate is on hold for the foreseeable future.
“The market was starting to think about rate cuts and price in a greater probability of that,” she said.
“That has probably been pared back a little by today’s statement and hence the currency is firmer and bonds are a little bit weaker.”
As the cash rate enters a 12th month at a record low, Housing Industry Association senior economist Shane Garrett said low interest rates had helped fuel growth in the housing sector.
Home construction is the sector tipped to take over from mining investment as the main driver of economic growth in the coming years.
“We estimate that new dwelling starts grew by 10 per cent during 2013/14, hitting one of the highest annual totals on record,” Mr Garrett said
“We expect that rates will remain unchanged over the next number of months at least as unemployment remains too high and economic growth is below trend.”
John Caelli, ME Bank General Manager Markets, had predicted the cash rate would stay on hold.
“Growth remains moderate and consumer confidence has taken a hit following the Federal Budget. The uncertainty over the Budget process will cloud the outlook for a period of time.
“The next likely rate change will be in the first half of 2015 and is likely to be up.”
TD Securities head of Asia-Pacific research Annette Beacher says the Reserve Bank appears willing to run the risk of higher inflation before raising interest rates.
“Even if the second quarter CPI exceeds the top end of the RBA’s band, it appears that it, like the Fed, is willing to run the risk of higher inflation before it acts, hence why we pushed our call for the first RBA hike to the first quarter of 2015,” she added.
– with AAP