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Aussie dollar recovers as RBA holds cash rate

Aussie dollar recovers as RBA holds cash rate

The Australian dollar spiked as the central bank held the cash rate at a record low 1.5%, regaining ground lost on economic news released earlier in the day.

The Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5% for another month following the June meeting of its board.

The Australian dollar jumped to trade as high at 74.90 US cents after the hold in the cash rate was announced, having been as low as 74.57 US cents earlier in the day, according to Bloomberg data.

CommBank economists said the Aussie dollar (AUD) fell against the US dollar (USD) early in the day after Australia's first quarter economic data "disappointed", with the current account recording a deficit of $3.1bn, when expectations had been for a surplus to be announced.

Commodity prices up

In a statement released after the board meeting, RBA Governor Philip Lowe said an overall increase in commodity prices and above-trend growth in advanced economies were taken into consideration when making the decision to keep the official cash rate steady.

“Commodity prices are generally higher than they were a year ago, providing a boost to Australia’s national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases,” he said.

Despite the recent drop in iron ore and coal prices, the RBA said business conditions in Australia had improved.

“Year-ended GDP (gross domestic product) growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3%,” said Lowe.

However, CommBank economist Gareth Aird commented in a note released after the cash rate announcement that in the RBA statement, "Lowe noted that, 'the transition to lower levels of mining investment following the mining investment boom is almost complete'" and Aird added that "most recently, the RBA said that we are 90% of the way through the downturn in mining investment”.

The RBA statement included that "business investment has picked up in those parts of the country not directly affected by the decline in mining investment".

Aird said this was not the same as saying that non-mining investment had picked up, noting that in last month’s statement, Lowe said that, “non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome”.

Property conditions 'starting to ease'

Lowe pointed to mixed conditions in property markets across the country, but with regard to areas of the market where prices have been rising "briskly", he said "there are some signs that these conditions are starting to ease".

“In eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades,” he said.

Decision 'no surprise'

CommBank's economics team said it expects the RBA to keep the cash rate on hold at 1.5% throughout 2017 and well into 2018.

Today's decision came as no surprise to the market with the Australian Securities Exchange (ASX) RBA Rate Indicator showing only a 2% chance of a cut in the cash rate to 1.25%.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance.