RBA puts rates on hold in August

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The Reserve Bank of Australia released its monetary policy statement earlier today and decided to leave interest rates unchanged at 2%. The RBA noted that it expects the US Federal Reserve to hike rates this year while noting that on the domestic front, economic activity in Australia is showing signs of growth, despite being below the long term average. The primary drivers of growth were said to be the labour market although there still exists a fair amount of slack in the economy. On inflation, the RBA noted that inflationary pressures were largely contained and is expected to remain this way in the near term and thus consistent with the target over the next two years. Inflation rate in Australia currently stands at 1.5%

On the housing market bubble which was a major cause for concern at its earlier policy setting meetings this year, the RBA noted that dwelling prices continue to rise but that it was working closely with regulatory authorities to curb the overheated housing market in Australia.

The RBA left the door open for rate cuts, a decision it is expected to take based on assessing further incoming economic data.

The RBA’s statement sounded more optimistic especially in its reference to the exchange rate. It said that the Australian dollar was adjusting to the decline in commodity prices but noted that further depreciation was necessary.

The RBA Governor, in his recent speech noted that weaker economic data did not necessarily warrant a rate cut from the RBA but that the Central Bank was closely watching the economic developments in the country.

We expect the RBA to maintain the benchmark interest rates at the current levels up until September, which is when the US Federal Reserve is expected to take a decision on hiking interest rates.

Australia Retail sales up 0.7%

Earlier in the day, the retail sales data was released, which posted at 0.7% growth, beating estimates of 0.5%. Previous month’s retail sales numbers were also revised higher to 0.4% from an earlier estimated 0.3%. On a quarterly basis, Australian retail sales jumped to 0.8% beating estimates of 0.4% posting a modest growth from 0.7% previously. Despite the gain, the Australian dollar remains subdued on a yearly basis and any signs of strengthening is likely to see the RBA officials talk down the currency.

AUD Reaction

The Australian Dollar was without a doubt bullish on the news as the currency spiked after the RBA’s release. AUDUSD spiked more than 1% for the day after the RBA’s release while the AUDNZD was up 0.8%. The AUDJPY gained 0.97% while the GBPAUD and EURAUD were down -0.9% and -1% respectively.

The next major risk comes from the Australian jobs report which is due on Thursday followed by the US nonfarm payrolls data later on Friday.

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