RBA Leaves Rates On Hold, Says Dollar Remains Overvalued

Getty/Brendon Thorne

The Reserve Bank of Australia has left interest rates on hold at a record-low 2.5%.

In its statement accompanying the decision the RBA noted the recent falls in the Australian dollar on currency markets. But it also said: “the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”

So they’re still keeping a watching brief on the dollar, even though it has edged below US85c occasionally in the last fortnight.

The Australian dollar barely moved on the statement, ticking up slightly to trade at 0.8495c before declining to previous levels of 0.8479c.

The statement also retained the now-familiar assertion that “the most prudent course is likely to be a period of stability in interest rates.”

In recent months many economists have been pushing out their forecasts for an increase in interest rates to the second half of next year. But others, notably Credit Suisse, have been forecasting further reductions to stimulate a flagging economy.

The RBA also noted that “commodity prices have declined significantly in recent months”, saying it was driven by “somewhat softer demand and, more importantly, increased supply.”

It also said wages growth should remain “relatively modest”, meaning inflation is likely to stay within its target band of 2-3%, even if the dollar continues to fall – essentially a way of saying that pay not keeping pace with inflation is one of Australia’s new economic realities.

The full RBA statement’s here.

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