HomeAction InsightCentral Bank ViewsRBA Maintained Status Quo, Warned that Strong Aussie is Curbing Growth

RBA Maintained Status Quo, Warned that Strong Aussie is Curbing Growth

As widely anticipated, the RBA left the cash rate unchanged at 1.5%. Policymakers acknowledged that June inflation drifted back below the +2% target but remained confident it would improve gradually alongside the pickup of the economy. Policymakers, however, warned of Australian dollar’s appreciation, suggesting that it would limit economic growth. A reference of the negative impact of strong currency on economic developments reappeared as AUDUSD has risen +5.7% from July’s low of 0.7567.

RBA noted that inflation came in "broadly as the bank expected", adding that "both CPI inflation and measures of underlying inflation are running at a little under 2%". Policymakers believed that inflation would "pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry". In the second quarter, Australia’s headline CPI eased to +1.9% y/y while the core CPI improved modestly to +1.5% y/y

However, currency appreciation is somehow tightening the economy. As the central bank suggested, the recent strength in Australian dollar was "partly reflecting a lower US dollar". It added that "the higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast". In July, the accompanying statement only noted "an appreciating exchange rate would complicate" the economic transition progress.

On the monetary policy, RBA reiterated that "taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time". Regarding questions over the impacts of US’s rate hike schedule and ECB’s more hawkish stance on RBA’s monetary outlook, Governor Philip Lowe noted that there’s no "automatic" link among the issues. It appeared that the central bank would keep its policy rate unchanged at the current level for some time.

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