The RBA says the Australian dollar could ‘complicate’ the economy’s adjustment

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As they have done since May last year, the Reserve Bank of Australia kept interest rates unchanged at 2.0% at the conclusion of its April policy meeting.

Answering the question many were pondering in the lead up to this meeting, the RBA decided to alter its language towards the Australian dollar in the accompanying policy statement, taking a slightly more aggressive stance towards its recent appreciation.

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” read the statement. “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

This was vastly different to the view expressed by the board in March when it noted “the exchange rate has been adjusting to the evolving economic outlook”.

While a risk to the economy moving forward should it be sustained, the bank was more optimistic towards the current state of the economy, noting that “available information suggests that the economy is continuing to rebalance following the mining investment boom.”

“Consistent with developments in the labour market, overall GDP growth picked up over 2015, despite the contraction in mining investment”, read the statement.

The bank also touched on the recent acceleration in credit growth to businesses, noting that “the pace of lending to businesses has also picked up”.

On the outlook for inflation, a critical factor in determining the outlook for interest rates, the bank suggested it was “quite low”, expressing a similar view to that of March.

“Recent information has confirmed that growth in labour costs remains quite subdued,” said the bank. “Given this, and with inflation also restrained elsewhere in the world, inflation in Australia is likely to remain low over the next year or two.”

Internationally, the bank kept is view unchanged, suggesting “that the global economy is continuing to grow, though at a slightly lower pace than earlier expected.”

As a consequence of the outlook for the domestic and global economy, the board acknowledged that “it is appropriate for monetary policy to be accommodative”.

It also suggested that with “”reasonable prospects for continued growth in the economy” and “inflation close to target”, the “current setting of monetary policy remained appropriate”.

In terms of the outlook for policy, the bank retained its mild easing bias in the final paragraph of the statement, indicating that on balance interest rates are still more likely to fall than rise in the period ahead.

“New information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing,” it said, keeping the language unchanged from March aside from a reference to heightened market volatility that was present at the time.

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

While large swathes of the April policy statement were similar to that expressed in March, the key talking point following this meeting is the bank’s updated view towards the Australian dollar.

Though it could have used a more aggressive tone towards its recent appreciation — something that has seen the Aussie rally more than 12% against its US counterpart since mid-January — this is a subtle reminder from the that continued strength in the currency could impact Australian economic growth moving forward.

While not enough to warrant a rate cut from the RBA at present, that view may change should the strength in the Australian dollar’s trade weighted index be sustained, or grow, in the period ahead.

With inflation set to remain low in the years ahead, the outlook for the domestic labour market, along with household consumption, will also play a crucial role in determining whether further policy stimulus will be required.

The full April RBA statement can be accessed here.