The RBA signals its discomfort with the rising Australian dollar

by Ben Pena August 3, 2017, 0:17
The RBA signals its discomfort with the rising Australian dollar

Australian Dollar's (AUD) Slumps Following RBA Rate DecisionThe "Aussie" initially rallied overnight on Monday as an unexpected rise in Australia's latest Manufacturing PMI and a 7% jump in iron ore markets helped to drive market sentiment higher. "The higher exchange rate is expected to contribute to subdued price pressures in the economy", Mr Lowe said.

"Its likely to be at least repeated in the Statement on Monetary Policy to be released Friday and could become even more strident going forward if the Australian dollar continues to rise".

Our central case is that growth will pick up to an above-trend pace in H2 2017, underlying inflation will lift to be back in the 2-3% target band and the RBA will deem, in early 2018, that it then has little reason for its very accommodative cash rate setting. One source of uncertainty for the domestic economy is the outlook for consumption.

"Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending", he said.

The Australian dollar climbed from $0.76 to above $0.80 over the last month, partly due to the weakness in the greenback.

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

"It is also weighing on the outlook for output and employment".

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Higher commodity prices, weakness in the US dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar.

The central bank kept its benchmark rate at 1.5% yesterday, as expected.

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years", Lowe said.

"Although RBA would like to cut rates to take upward pressure off the Australian dollar, it can't cut rates as it fears re-stoking the residential property market".

Nicholas Gruen, CEO of Lateral Economics, was far more succinct when explaining why he believed rates would remain steady.

The Australian share market is expected to start the week higher, bouncing back from Friday's 1.4 per cent plunge on the back of concerns about the USA economy and the direction of U.S. government policy. It pointed to a gradually improving economy, though rising household debt remained a concern.

"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", the bank said.


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