The Reserve Bank of Australia has kept the cash rate at 2.5 per cent, saying rate cuts in the past two years are helping interest rate sensitive parts of the economy.
The decision was expected, with all 12 economists surveyed by AAP last week forecasting no change at the Melbourne Cup Day board meeting.
The RBA last cut the cash rate in August, by a quarter of a percentage point, and before that in May, by the same amount.
RBA governor Glenn Stevens said economic growth was still a little bit below trend, but he expects the economy to pick up next year.
“Private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook,” he said in a statement accompanying the decision.
“There has been an improvement in indicators of household and business sentiment recently, but it is still too soon to judge how persistent this will be.”
However, Mr Stevens said the Australian dollar was still “uncomfortably high”, and has said in the past that this is not helping the weaker parts of the economy.
“A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy,” Stevens said.
“The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.”
JP Morgan economist Ben Jarman said the governor had used stronger language about the Australian dollar in his statement.
“They’re getting more concerned about the direction of the Australian dollar and the fact that it’s refusing to come down in line with the momentum of the real economy and interest rates,” Mr Jarman said.
“They described it as `uncomfortably high’ which is probably the strongest language they’ve used in this cycle to describe the currency.
“They said a lower level was likely to be needed to achieve balance so it’s almost a necessary condition, now, for the economy to stabilise.”
The Australian dollar dipped slightly after Tuesday’s RBA decision, to 94.87 US cents at 1452 AEDT.
Jarman said the persistent strength of the Australian dollar meant the Reserve Bank would likely have more work to do, with another cash rate cut on the cards next year unless the Australian dollar falls in the meantime.
Tapering of the US economic stimulus program was hoped to have pushed the US dollar higher and knocked the Australian dollar lower, but that doesn’t look like happening soon, he said.
“Unfortunately, tapering is on the backburner for a little while so the question is, can the RBA hold out until we get that move?,” Jarman said.
RBC Capital Markets senior economist Su-Lin Ong said the RBA is concerned that the high exchange rate won’t help the economy when mining investment slows down.
“The new sentence that has been inserted is concern about the currency and the discussion that the Aussie dollar is uncomfortably high,” she said.
“I think its clear that the RBA is reasonably comfortable (with the economy) at this point in time.
“What it is uncomfortable with is the currency, and it will have some bearing on policy and policy deliberations – whether we stay on hold in the future or the odds of a rate cut increases.”
Ms Ong said she hasn’t changed her forecast that the next interest rate cut will be in the June quarter of 2014.
AAP
