RBA Holds Steady at 2.5% as Mixed Conditions Create Policy Dilemma

The Reserve Bank of Australia (RBA) announced it is keeping interest rates unchanged at a historic low of 2.5% earlier today, for the 13th month in a row. Forex Magnates' analysis suggests the vast majority of market participants were expecting an unchanged decision and continue to expect no further base rate changes until mid-2015 at the earliest.

The RBA is struggling to walk a tightrope of sustaining agreeable economic conditions that facilitate growth and employment, while capping inflation and property market speculation that could potentially lead to a housing bubble. The additional issue of a high currency Exchange rate adds a new dimension of complexity to the RBA's mandated tasks of "contributing to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people."

“There has been some improvement in indicators for the labour market this year, but it will probably be some time yet before unemployment declines consistently,” said Glenn Stevens, RBA Governor. Adding, "Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year.”

Routine AUD Strength

The routine mention of a high Australian dollar was once again evident as the RBA continues to assert its dislike for the persistently high AUD/USD rate in particular - given Australia's major commodity exports being priced in US dollars. The RBA stated, "The Australian dollar is high by historical standards, particular given the declines in commodity prices...hence is offering less assistance than it might in achieving balanced growth in the economy," said Mr.Stevens.

Low interest rates are creating the necessary environment for a burgeoning housing market, more residential construction and helping to reinforce consumer spending, but failing to translate into economic growth - in part due to a high Australian dollar.

In his testimony before the House Economics Committee in July, Governor Stevens pointed out that so far in 2014, mortgage rates had fallen by the equivalent of 0.25% without the RBA having to adjust policy.

The common theme at the RBA is that while the AUD remains high, the RBA is unlikely to change interest rates, especially to the upside. In a statement, the RBA noted improvements in consumer confidence and improving business surveys among non-miners as reasons for cheer. However, economic dangers in the form of a high AUD and rising unemployment were cited as reasons for holding off on a rate normalization cycle. In August 2014, the unemployment rate rose to 6.4% from 6.0% in July.

Next Steps

On Wednesday we expect the Australian Bureau of Statistics (ABS) will reveal quarterly GDP figures for Q2 2014 at 11:30 AEST (expected at 0.4%), followed shortly after by Glenn Stevens' speech at the 'Committee for Economic Development of Australia' in Adelaide, scheduled for 13:20 AEST.

Any comments relating to RBA monetary policy and the likely schedule of future interest rate policy will be keenly anticipated by market participants given the RBA's neutrality for the time being.