RBA Maintained Status Quo, Warned that Strong Aussie is Curbing Growth

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The Reserve Bank of Australia held interest rates steady at a record low 1.5% as expected on Tuesday, citing the potential impact of a stronger Aussie dollar.

The Reserve Bank of Australia (RBA) said it expected the higher exchange rate between the Australian dollar and its U.S. counterpart was expected to keep price pressures subdued but was also weighing on the outlook for output and employment.

The Australian dollar has jumped about 8% since June to a two-year peak, largely driven by a battered greenback.

In the Asian trading, the Australian dollar fell to 0.7996 against the USA dollar and 88.12 against the yen, from an early 5-day high of 0.8043 and a 4-day high of 88.70, respectively.

Economist Saul Eslake said that the RBA would clearly prefer not to have to cut rates any further, but is also in no hurry to start raising them-even if central banks elsewhere in the world do.

The recent inflation numbers were as expected.

Subdued inflation, however, is not an Australian phenomenon. That has partly led the Federal Reserve to tamp down on market expectations over the future pace of tightening. The bank had reduced the rate by 25-basis points each in August and May a year ago.

The RBA will hold its monthly policy meeting on Tuesday, at which it is widely expected to keep rates at 1.50 percent after last easing a year ago. It would take a significant event to send the Euro higher from current levels. The IMF last month reaffirmed its forecast that the world economy would expand 3.5 percent this year, up from 3.2 percent in 2016.

Kate Hickie at Capital Economics said: "We suspect that both growth and inflation will ultimately turn out lower than the RBA anticipates. And any serious debate about lifting rates is unlikely before late 2018".

Interbank futures now show nearly no chance of a hike in rates for the remainder of this year, but also no prospect of an easing either.

Nevertheless, policymakers were optimistic with the labor market after a big two-month full-time job boosts in nearly 30 years. Corporate profits are surging while measures of business confidence and conditions are the strongest since 2008.

And he did point to the disturbing trend that "growth in housing debt has been outpacing the slow growth in household incomes".

Indeed, at a recent speech at the Anika Foundation Luncheon in Sydney, RBA Governor Philip Lowe said that "the persistent slow growth in wages is creating a challenge for central banks".

"With the high dollar, low inflation and low wage growth, there is no rush to put up rates just yet".

Conditions still "vary considerably around the country" with prices rising "briskly" in some markets but "declining" in others.

Given that view, it means that all attention will fall on the accompanying monetary policy statement, particularly what the bank has to say in relation to Australia's labour and housing markets, the outlook for inflation and economic growth, as well the current level of the Australian dollar.

The news does not come as a surprise, with the ASX 30 Day Interbank Cash Rate Futures August 2017 contract pricing in a 100 per cent chance of "no change" as at 31 July 2017.

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