RBA Left Cash Rate Unchanged at 1.5%, Content with Aussie Depreciation

Central banks news

RBA left the cash rate unchanged at 1.5% for a 21st meeting in July. The outcome had been widely anticipated. Indeed, the market has expected no interest rate adjustment at least until late 2019. As a result, market reaction outcome was rather muted.

On the global economic development, RBA acknowledged growth is “continuing” after noting it “strengthened” in the prior month. The members retained the view of solid Chinese economic growth. Yet, this month they pointed out the “uncertainty” driven by US trade policy. While reiterating “expansionary” financial conditions worldwide, the central bank acknowledged rate hikes in some economies.

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Concerning the domestic market, RBA noted that short-term wholesale interest rates have increased over recent months. While attributing to US’ interest rate normalization, RBA for the first time admitted that “there are other factors at work as well”. The members, while not specifying the factors are, pledged to monitor the developments. On economic activities, RBA acknowledged the strong growth in 1Q18 but cautioned over the slowdown in household spending. It also warned of the sluggish growth in household income and elevated debt levels. Recall that GDP expanded +1.03% q/q in 1Q18, strongest since 3Q11. From a year ago, growth was +3.14%.However, consumption, usually taking up two-third of the GDP of an advanced economy, only grew +0.2%. This could be explained by seasonal factor but attention is warranted. Policymakers were also upbeat over the unemployment market, noting the low unemployment rate and the improving participation rate. They remained concerned over the slow wage growth but were confident that the rate has bottomed.

On exchange rate, RBA indicated that Aussie has “depreciated a little, but remains within the range that it has been in over the past two years”. This is compared with the June comment that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. We believe this reflect that the members are content with the current level of Aussie.

The monetary policy stance was merely a repeat of the previous meetings, signaling that keeping the policy rate unchanged is consistent “with sustainable growth in the economy and achieving the inflation target over time”.