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  • The RBA signals its discomfort with the rising Australian dollar

The RBA signals its discomfort with the rising Australian dollar

Australia Inflation Misses Target Australia Inflation Misses Target
Debra Rodriguez | 03 August, 2017, 00:55

He said Dr Lowe's statement "effectively says that a stronger Australian dollar amounts to a de facto monetary policy tightening which threatens the RBA's growth forecasts".

He said Dr Lowe's reference to higher commodity prices against the backdrop of expected weaker terms of trade also indicated the RBA was unconvinced a recent bounce in commodity prices was sustainable. It would also cause the progress in economic activity and inflation to be slower than predicted.

'The higher exchange rate is expected to contribute to subdued price pressures in the economy.

The Reserve Bank of Australia has unveiled its decision on interest rates following its monthly board meeting.

Since the start of this year the Australian dollar is up almost 5% against the USA dollar - largely, the RBA noted, a result of weakness in the U.S. currency. Investors in residential property are facing higher interest rates.

"With headline inflation tracking slightly below the 2 to 3 per cent target range, labour markets tightening and the economy continuing to grow, albeit at a pace below trend, the chances of a rate cut appear to have diminished", he said.

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But HSBC Australia chief economist Paul Bloxham - who is expecting a cash rate hike early in 2018 - disagreed that the currency's strength would stay the RBA's hand.

There had been speculation in the mainstream media that interest rates would need to rise sooner rather than later, particularly as house prices in Sydney, Melbourne and Canberra posted double-digit growth year-on-year, according to the CoreLogic Hedonic Home Value Index. Some pick-up in non-mining business investment is expected.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending". Growth in housing debt has been outpacing the slow growth in household incomes.

They're expected to show continued solid jobs growth in the U.S. with 180,000 new jobs created in July and a fall in the unemployment rate, coupled with subdued wages growth. In some other markets, prices are declining. A factor working in the other direction is increased competition from new entrants in the retail industry.

RBC capital markets are bullish the Aussie versus the Pound as, "Absent any shift in rate expectations, our default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low".

The RBA also remained fairly neutral in its outlook for future growth as it said "forecasts for the Australian economy are largely unchanged", which would suggest that the bank's quarterly Statement on Monetary Policy (SoMP) on Friday will not deviate greatly from the RBA previous forecast of 3% annual growth.

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