The Reserve Bank of Australia left its cash rate unchanged on Tuesday as widely expected and once again said that the exchange rate remains high by historical standards even as it maintained its guidance to a period of stable rates.
“The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months. The exchange rate remains high by historical standards,” the RBA said in the cash rate statement.
Still, the RBA said it expects continued accommodative monetary policy to support demand and strengthen growth.
This is the eighth consecutive meeting without any rate action from the RBA and the fourth meeting where it has offered the same guidance that “the most prudent course is likely to be a period of stability in interest rates.”
The RBA has trimmed the cash rate by a total of 225 basis points since an easing cycle that began in November 2011, reaching 2.5% in August.
There were very few changes in the latest statement as compared to the April one.
The RBA was expected to make some detailed comments on inflation after lower-than-expected first quarter data. However, it only said, “growth in wages has declined noticeably and this has been reflected more clearly in the latest price data, which show a moderation in growth in prices for non-traded goods and services. As a result, inflation is consistent with the target.”
Even with lower levels of the exchange rate, the RBA expects inflation in line with its 2% to 3% target provided domestic costs remain contained.
On the domestic economy, the RBA said there is moderate growth in consumer demand, which was a small change from the previous month when it said information suggested “slightly firmer” consumer demand. The RBA maintained its view of “strong expansion in housing construction.”
However, on non-mining business investments, the RBA continued to have a less certain view. “Resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative as firms wait for more evidence of improved conditions before committing to expansion plans,” the RBA said.
On public spending, the RBA refrained from making any fresh comment prior to the May 13 federal budget. It merely repeated “public spending is scheduled to be subdued.”
As for commodity prices, the RBA said they remained high in historical terms but added that “some of those important to Australia have softened further of late.” The reference was to the recent softening in iron ore and coal prices.
The RBA was clearly positive on the labor market saying that indicators for the market had improved. But it “will probably be some time yet before unemployment declines consistently,” the bank said.