The RBA decided to leave the cash rate steady at 2.25%, preferring to let the February cut work its way through the economy and to retain some ammunition for future rate cuts, if required.

Consensus amongst economists was evenly split leading into the meeting, but the Australian share market appeared to be certain of a rate cut given a near 80 point rise since this morning. At the time of writing, the market has already given 60 points back. In contrast, currency markets appear to have got the call right with the Australian dollar (AUD) up just over 1 cent against the US dollar (USD).

In their statement, the RBA cited the expectation of moderate growth in the global economy in 2015, with the US economy continuing to strengthen in contrast to a slowing China and falling commodity prices.

The main concern for the RBA is the Australian economy growing below trend with weak domestic demand growth and the large fall in the terms of trade (difference between what we get paid for exports versus what we pay for imports) severely reducing income growth for the economy. As a result, they expect the unemployment rate to rise a fair bit from current levels and for inflation to remain low as labour costs remain subdued.

They also cited the pick-up in credit growth, which has largely been seen in the strong growth in lending to investors in residential housing. Though they did note that continued strong house price rises in Sydney were somewhat at odds to the trends in a number of other cities more recently. The RBA specifically made mention of the work they’re doing with regulators to curb risks arising from excessive house price growth.

The RBA maintains the dollar needs to be lower against all currencies, not just the US. They continue to be concerned with the AUD stabilising in the high 70s (against the USD) and actually rising against other currencies, given the expected delay in the US central bank raising rates (second half of this year now looking likely) and the commencement of quantitative easing in the Eurozone (significant downward pressure on the EURO).

On balance, the RBA appears to be waiting on data to gauge the effects of the February rate cut and to assess whether the economy is stabilising or worsening, which would likely lead to another rate cut before the end of the financial year. The path of data is now key.

 

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