The Reserve Bank of Australia kept its benchmark interest rates steady at 2.25% at its March monetary policy meeting earlier today. Citing a below trend growth, the subdued labor costs keeping inflation in check, the RBA expects the short term inflation to remain consistent over the next two years. The RBA also took notice of a stronger Greenback and noted that although the Australia Dollar declined it still remains above its fundamental value given the significant declines in key commodity prices. The RBA kept its usual rhetoric that a lower exchange rate was needed in order to achieve balanced growth in the Australia economy.
Considering that the RBA cut its interest rates last month by 25bps from 2.5% to 2.25%, the RBA’s monetary policy statement noted that the board felt it appropriate to keep interest rates steady but hinted that further policy easing would be appropriate in the months ahead.
The reaction to the RBA keeping interest rates on hold saw the Aussie dollar surge across the board lifting off from lows near 0.7756 to trade around 0.78 against the Greenback. The Kiwi dollar also got a boost managing to rally to 0.753 at the time of writing.
The markets at large had expected another rate cut from the RBA in March, although it was a close call. The ASX Interest rate tracker also saw a 60% expectation for a rate cut from the RBA today, but the markets were taken off guard in their expectations.
With forward guidance now set, the RBA could either look to a rate cut in April or probably in May. Tomorrow, the quarterly GDP data and retail sales are due to be released with consensus expecting to see the GDP growing at 0.7% for the quarter while the monthly retail sales is expected to rise 0.4%
Of particular interest will be the commodity prices as well which in its most recent release declined -20.6% and continues to fall gradually.
While a rate cut in April would yet again be another close call, the markets are certain that the next rate cut will be bound to happen during the May monetary policy review.
The RBA will release its meeting minutes on March 17th which would give more insights into the discussions that led the board to keep interest rates on hold. Going by the previous reasoning for an earlier than expected rate cut, the RBA minutes could very well be seen as bullish for the AUD.
The main points from the RBA’s policy statement were:
- RBA expects inflation to remain within target despite a lower currency rate
- RBA notes the strong rise in dwelling prices
- Further declines in AUD is required to balance growth
- Subdued labor costs growth to keep inflation in target
- Will assess the case for easing at upcoming events
- Further easing may be appropriate in the future
- Domestic demand growth weak
