The Reserve Bank of Australia (RBA) kept its cash rate unchanged at its November meeting on Tuesday. The decision was widely expected by economists as the domestic economy has remained resilient in the face of ongoing slowdown in China, and the weaker Australian dollar has helped offset some of the impact of falling commodity prices.
Interest rates have now been kept at 2.0% since the May meeting when rates were last cut. It followed another cut in February, bringing the total cut this year to 50 basis points. The Australian dollar has been on a downtrend since April 2013 and has largely followed the slide in commodity prices, which the Australian economy is heavily reliant upon.
The deepening slowdown in China this year has put additional pressure on the aussie, pushing it to 6½-year lows of 0.6907 against the US dollars in August. But the RBA has since the August meeting toned down its calls for the further depreciation of the currency, which has helped the aussie gain around 4%.
Today’s statement from Governor Glenn Stevens was slightly more dovish than the October meeting’s statement, even though it highlighted the improved growth prospects in the United States and in Europe. The weaker-than-expected inflation figures for the third quarter are likely to have contributed to the lowered inflation outlook. Stevens said inflation should remain consistent with the target over the next 1-2 years, but will be “a little lower than earlier expected”.
One factor that had made the RBA uneasy about cutting rates further was the booming property prices in major urban areas such as Melbourne and Sydney. Major banks have recently increased mortgage rates and new supervisory measures have, in the RBA’s view, helped contain the risks to the property market. This may encourage the RBA to cut rates further in the coming months if the inflation outlook deteriorates further.
The Australian dollar climbed higher against the US dollar after the RBA’s announcement as investors were not convinced from today’s statement that rates could be cut as early as December. Improved risk sentiment and recent signs of stabilisation in China also aided the aussie’s bullishness. The aussie climbed to 0.7212 against the greenback after the decision from around 0.7169 before the statement. It extended its gains to 0.7218 before easing to around 0.7183 in mid-European trading. Against the New Zealand dollar, the aussie peaked at 1.0711 before falling back to 1.0690.