The Reserve Bank of Australia left its cash rate unchanged on Tuesday as widely expected and shifted its bias to a more neutral stance by saying monetary policy is appropriately configured and interest rates are likely to remain stable for a period.
In the previous statement, the RBA said while monetary policy setting remained appropriate, it will “continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.”
At a board meeting Tuesday, the RBA kept the cash rate on hold at a record low 2.5%. All 20 economists predicted the outcome. This is the fifth meeting in a row where the RBA left the cash rate unchanged.
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.
In statements in the recent past, the RBA didn’t provide any explicit rate bias in the statement, but the tone of the statement was towards easing. Tuesday’s statement was more explicit as the RBA said “on present indications, the most prudent course is likely to be a period of stability in interest rates.”
An important change in the statement was the removal of “uncomfortably high” description for the Australian dollar. This was in line with expectations as the exchange rate is now lower than its level in November and also August.
In Tuesday’s statement, the RBA said “the exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.”
The other key change was in the wording around inflation. The RBA said “inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the (2% to 3%) target over the next two years.” This change in language follows after higher than expected inflation in the fourth quarter.
The RBA said the rise could be explained in part by faster than anticipated pass-through of the lower exchange rate, but also noted that domestic prices continued to rise at a solid pace.
The RBA will release its latest forecasts on the economy in the quarterly Statement of Monetary Policy due Friday.
Looking ahead, the RBA said it “expects growth to remain below trend for a time yet and unemployment to rise further before it peaks.” But beyond that, it expects growth to strengthen, helped by continued low interest rates and a lower exchange rate.
Overall, the tone of the statement was more positive, with the RBA saying recent information suggests “slightly firmer consumer demand and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have shown improvement.”