RBA Cash Rate on hold

The Reserve Bank of Australia (RBA) has left the official cash rate on hold for the second consecutive month.  At its board meeting earlier today, the Bank said it was prudent to leave the official cash rate at a historic low of 2.75 per cent.

The RBA is still fairly upbeat about the economy:

"Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined further but, overall, remain at high levels by historical standards. Inflation has moderated over recent months in a number of countries."

The Australian dollar has depreciated over the past month which will assist some areas of the economy.   

"The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."

The high dollar has been working to keep inflation in check so with the dollar falling, there may be some upward pressue on CPI over the next 6-12 months.  HSBC chief economist Paul Bloxham commented that the falling Australian dollar had pushed the RBA to leave rates untouched.

According to Mr Bloxham, the Australian dollar is starting to act as a shock absorber for the nation’s economy. On a trade-weighted basis, the dollar is now 11 per cent lower than it was in mid-April.

“From the RBA’s perspective, the fall in the Australian dollar will be the key development affecting its policy view,” he said. “General rules of thumb suggest that a 10 per cent depreciation could add around 0.3 to 0.4 percentage points to the consumer price index each year which, all else equal, would lift the RBA’s inflation forecasts to around the middle of the target band by end-2013.

So rates are on hold at the moment and with the Australian dollar now around 90c, they may be on hold for a while longer as the RBA looks set to see how the recent changes flow through the economy and the dollar's effect on inflation.

The RBA's full media release can be found here. 

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Until next month .....