The RBA left the cash rate unchanged at 2.5% for a year in August, marking the second-longest period of stable interest rates since the RBA started setting the cash rate in the mid-1980s. The accompanying statement delivered few changes to the economic and monetary policy outlook. The RBA noted firmed growth but attributed the rise in inflation to temporary factors. It continued to warn over the strong Australian dollar. Policymakers reiterated that ‘the most prudent course is likely to be a period of stability in interest rates’ given current economic indicators. .
The central bank acknowledged that the global economy continued to grow at ‘a moderate pace’ while domestic growth was ‘firmer’ as driven by ‘very strong increases in resource exports’ which would likely ease in coming quarters. It also noted the improvement in the labor market this year, but affirmed that it would be ‘some time yet before unemployment declines consistently’. On inflation, policymakers noted the recent pickup in both the headline and core readings, probably affected by the ‘decline in the exchange rate last year’. However, they judged that growth in wages, which had declined noticeably, should ‘remain relatively modest over the period ahead’. This should keep inflation ‘consistent with the target’ even the exchange rate decline later in the year.
Policymakers remained concerned about the strength in Australian dollar, noting that ‘the exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy’. The language is the same as the previous month.
Given the largely unchanged policy statement, we retain the view that the RBA would maintain the cash rate unchanged for the rest of this year and next year. Released earlier today, Australia’s trade deficit narrowed to AUD1.68B in June from an upward revised AUD2.04B a month ago. The trade figures suggested that net exports will deduct 0.75-1% from quarterly growth. Together with weak retail spending, the country may record little or even negative growth in 2Q14.