Home Central Banks RBA Leaves Key Interest Rates on Hold at 1.5 Percent in May

RBA Leaves Key Interest Rates on Hold at 1.5 Percent in May

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By: Adrian Moore – Forex Focus

Highlights of the monetary-policy statement and market outlook on interest rates

The board of the Reserve Bank of Australia (RBA) decided to leave its benchmark interest rate on hold, following the conclusion of its monetary-policy meeting on May 1, 2018. The key interest rate, or the cash rate, was left untouched by the bank and is currently at historical lows of 1.5 percent. The Reserve Bank last altered the interest rate in August 2016 when it cut the cash rate by 25 basis points—from 1.75 to 1.5 percent. According to the monetary-policy committee of the central bank, low interest rates in the country are lending support to economic growth on the back of a rise in employment levels and gradual increase in consumer inflation.

Following are some of the observations of the central bank with regards to the Australian economy:

  • The bank expects the Australian economy to grow at an annual pace of more than 3 percent in 2018 and 2019.

  • Business conditions are positive with an upsurge in investments in non-mining activity.

  • Rise in public infrastructure investments contributing to broader economic growth.

  • Growth in employment moderating in the last few months after putting up a robust show in 2017.

  • Labour-force participation seeing significant rise in women and older Australians.

  • Uncertainty in household consumption due to slow growth in household income.

  • Underlying inflation to remain low in the near-term, reflecting low wage growth and strong competition.

  • Anticipates CPI (consumer price index)inflation to rise above 2 percent in 2018.

  • Housing prices largely unchanged in the last six months, with few areas recording price declines.

  • Household debt remains at elevated levels.

On the current condition of the global economy, the central bank is of the view that:

  • The global economy as a whole has strengthened over the past year with above-trend growth in most of the advanced economies.

  • Enhanced economic conditions are leading central banks in a number of countries to withdraw monetary stimulus.

  • Low unemployment rates are lending support to economic growth.

  • Although inflation remains low in most economies, the tight labour market should boost inflation, going forward.

  • Long-term bond yields continue to remain low but have risen in the last few months.

  • Financial conditions are expansionary, although US-dollar-denominated short-term money markets have seen some tightening.

  • The rise in short-term interest rates in the United States has led to a corresponding increase in interest rates in some countries, including Australia.

  • Equity markets are volatile, partly due to concerns about the international trade policies of the US.

  • The Chinese economy is witnessing solid growth, with the government closely monitoring risks to the financial sector.

  • The recent rise in the prices of crude oil and some base metals are expected to affect the country’s terms of trade over the next few years.

The RBA also noted that any rebound in the Australian dollar, which has depreciated quite a bit, will result in both economic activity and inflation slowing down in the country and will affect the current forecast. 

Key economic data 

The seasonally adjusted unemployment rate in Australia came in at 5.5 percent in March of this year and has largely remained unchanged compared to the previous two months, following the downwardly revised figures in February. The unemployment rate was in line with market expectations, although the economy added only 4,900 jobs, lower than market estimates of 21,000. Meanwhile, the number of unemployed persons in the country dropped by 2,400, with a rise in part-time employment offsetting the decline in full-time jobs.

Consumer prices, meanwhile, rose to 1.9 percent in the first quarter of this year, unchanged from the previous quarter and slightly below market estimates of a 2-percent increase. Housing, transport, education, insurance and financial services registered a year-on-year decline, while inflation in the food and health sectors rebounded. The inflation rate has been hovering between 1.8 and 2.1 percent for the last five quarters.  The core inflation rate rose to 1.9 percent in the quarter ending March, compared to a reading of 1.8 percent in the previous four quarters respectively.

Currency outlook 

The Australian dollar fell versus the greenback and gained against the euro following the RBA’s interest-rate decision. The national currency has, however, remained weak versus the two majors this year. Against the US dollar, the Aussie has ended in the red for the last four out of five years, slipping from 1.0390 at the start of 2013 to settle at 0.7801 in 2017, a drop of close to 25 percent. Going forward, the AUDUSD pair, which is currently in a primary uptrend, could find support around the 0.7300 mark, with the pair likely to rebound from these levels. Key resistances and breakouts are placed at around 0.8300, a close above which the pair could surge by 10 to 12 percent.

The Aussie-euro pair remains in a long-term downtrend, with near-term supports at 0.6150-0.6200, which is unlikely to be breached for now. On the upside, immediate resistances are placed at 0.6300 followed by 0.6400. A close above the resistances should take the pair towards the higher end of the long-term bearish channel at 0.6800. Short-term traders can look to go long on the Aussie at the supports with stops at 0.6100 and targets of 0.6300-0.6400.

Interest rate outlook 

The central bank of Australia hasn’t moved on interest rates since August 2016, a record-breaking period of 19 meetings with no change in the monetary policy. Going by the statements of the Reserve Bank and the dovish tone following the recent policy meeting, analysts expect interest rates to remain pat for an extended period.

While there were few changes in the RBA’s statement with reference to slow growth in employment and inflation, it’s amply clear that Australia’s central bank will continue to keep interest rates on hold until they are confident that labour-market conditions are boosting wages and consumer inflation.

 

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