RBA: Rates On Hold But The Economy Is Wrestling With A High Australian Dollar

Getty/Mark Nolan

The Reserve Bank’s quarterly statement on monetary policy is a window into its thinking, with more detail than we get in the governor’s short statements after each month’s board meeting.

In this quarter’s statement the RBA signaled that interest rates will remain on hold for some time, noting “that the current accommodative monetary policy setting is likely to be appropriate for some time yet.”

But as Nigel Stapleton, now a Professor at UNSW, told me many years ago when he was at Westpac, these documents are backward looking, which often makes it difficult to garner any real insight without some interpretative licence.

So with this in mind — and after reading the relevant sections several times — the overriding message from today’s release is that the rise in the Aussie dollar has derailed the RBA’s expectations for the outlook for growth.

Source: RBA SoMP May 2014

To this end the RBA is cautiously optimistic about the path of growth in Australia, upgrading its forecasts for growth this year while at the same time downgrading the outlook for inflation.

Reflecting the rebound in the Aussie dollar and recent RBA studies on the impact of exchange rate depreciation, both in the immediate term and over a number of years, the RBA has downgraded it’s outlook beyond the current year.

It seems clear the RBA remains disappointed with the persistent strength of the Aussie dollar, and that this was not in its original forecasts, even though the RBA does recognise that this is in large part about US dollar weakness as improved local data.

But showing it disquiet with the AUDUSD rise the SoMP says:

Although the Australian dollar is still around 10 per cent below its recent peak in April 2013, it nevertheless remains 16 per cent above its post-float average in nominal trade-weighted terms and around 30 per cent above its post-float average in real trade-weighted terms.

Clearly they want it lower still.

Briefly elsewhere the RBA was upbeat on the pick up in housing and cautiously optimistic on employment even though they noted there is still “significant” slack in the labour market.

So all in all the RBA notes that the economy has headwinds, not least of which is the Aussie dollar but that “Since last August, when the cash rate reached its current low level of 2.5 per cent, evidence of the effects of the substantial degree of stimulus already imparted has continued to accumulate.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.