Cash rate left on hold by RBA

02_Cash rate left on hold by RBA

By Marty Silk
(Australian Associated Press)

The Reserve Bank has left the cash rate at a record low of two per cent, but it seems to be more dovish about inflation.

At its second board meeting of the year, the central bank held the cash rate steady for an eleventh straight month but again left the door open to further cuts if needed.

RBA governor Glenn Stevens is upbeat about the domestic economic growth, noting evidence the non-mining parts of the economy strengthened in 2015 despite a contraction in mining investment.

“The board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The board therefore decided that the current setting of monetary policy remained appropriate,” he said in a statement after Tuesday’s meeting.

However, Mr Stevens said the central bank would need to judge if the labour market was improving and whether global financial turbulence foreshadowed lower domestic demand.

He seemed marginally more dovish about low inflation too, saying the RBA would keep a close eye on the situation.

“Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand,” the RBA governor said.

BNP Paribas interest rate strategist Altaz Dagha noted how Mr Stevens’s February statement indicated low inflation “may” provide scope for a rate cut, but Tuesday’s said it “would”.

“The door clearly is still open for potential easing later in the year if necessary,” Mr Dagha told AAP.

Westpac chief economist Bill Evans also believed the RBA’s easing bias seemed to have increased, but he predicted the board would not act in the near future.

“Our own forecasts around these issues support a steady policy outlook,” Mr Evans said.

“However, we cannot ignore the decision to strengthen the language around the easing bias.”

But JP Morgan economist Ben Jarman said the changes in Mr Stevens’s February and March statements were essentially edits, rather then re-writes.

He said the paragraph on low inflation had been trimmed “presumably to not overstate the pressure for lower rates”.

“We continue to view the RBA board’s preference as being toward inaction, as domestic activity momentum looks sufficient to stabilise inflation at this point,” Mr Jarman said.

CommSec chief economist Craig James also said the RBA’s preferred course of action was to keep rates on hold.

Mr James tipped inflation to rise over 2016 as import prices responded to the weaker Australian dollar.

“CommSec doesn’t expect any change in the cash rate for the foreseeable future,” he said.

“It’s easy to forget, but interest rates are the lowest they have been in the modern era – that is, stretching back over 60 years.”

The official interest rate has been sitting at two per cent since last May.


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