RBA prepared to keep rates on hold, despite dollar concerns

July 15, 2014 – 12:27PM

By Mark Mulligan
You may read the article here or click on the link below to go to the full site.

RBA governor Glenn Stevens.RBA governor Glenn Stevens. Photo: Louie Douvis

 

The Reserve Bank of Australia has indicated it will leave interest rates unchanged for some time, although there are ongoing concerns about non-mining growth and the high Australian dollar.

In the minutes of its July 1 board meeting, released on Tuesday, the RBA says the most prudent course to follow “was likely to be a period of stability in interest rates.”

It left the cash rate unchanged at 2.5 per cent after that meeting.

The subtle change in language from the June minutes – when it said “current accommodative stance of policy was likely to be appropriate for some time yet” – has already been factored in to the markets.

After heavy trading in the lead-up to the minutes’ release, when the dollar hit US94.03¢, it eased back a bit to US93.96¢.

The RBA said: “Low interest rates were working to support demand, but members agreed that it was difficult to judge the extent to which this would offset the anticipated substantial decline in mining investment and the effect of planned fiscal consolidation.

“The exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy.”

The release of the minutes follow a speech by RBA Governor Glenn Stevens recently in which he warned the dollar remained stubbornly overvalued.

Market-watchers saw it as an attempt to talk the currency down, to help non-mining exporters and exporter-exposed industry pick up much of the slack left by the end of the mining investment boom.

The board at its July meeting reiterated expectations of slower GDP in the foreseeable future after a surge in the first quarter this year.

“With growth in resource exports expected to ease back, GDP growth was forecast to be a little below trend over the next year or so, before picking up gradually thereafter,” it said.

“Inflation was expected to remain within the target.

“Accordingly, with the significant degree of monetary stimulus already in place to support economic activity, the board judged that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

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