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RBA holds cash rate as rising dollar weighs on growth

RBA holds cash rate as rising dollar weighs on growth

The Reserve Bank of Australia left the official cash rate on hold at 1.5% amid low wage growth and inflation.

In a statement largely unchanged from last month, the Reserve Bank of Australia (RBA) decided to leave the official cash rate on hold at 1.5% following its September board meeting.

The Australian dollar was trading at 79.82 US cents several hours before the RBA’s decision and dropped to 79.55 US cents immediately after the announcement.

What does the RBA’s decision mean for the Australian dollar?

Philip Lowe, the RBA's Governor, continues to speak about a desire to use a low official cash rate to slow the rise of the Australian dollar against the United States dollar.

“The Australian dollar has appreciated over recent months, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to the subdued price pressures in the economy. It is also weighing on the outlook for output and employment,” said Lowe.

“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

Last week, CommBank currency strategists forecast a firmer Australian dollar to be at around 82 US cents by March 2018 and are expecting a move to 85 US cents by December 2018.

Lowe has now completed his first year as RBA Governor with a constant cash rate over the period.

"Wage growth remains low," he said in the statement. "This is likely to continue for a while yet, although stronger conditions in the labour market should see some lift in wages growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens."

CommBank Chief Economist Michael Blythe said in a note released after the cash rate announcement: "We suspect another year of masterly inactivity is in store from here. We expect the RBA to leave the cash rate at 1.5% for the remainder of 2017 and most of 2018."

What does the RBA’s decision mean for property markets?

In the RBA's statement, Lowe noted that "residential construction activity remains at a high level, but little further growth is expected". 

Tim Lawless, Core Logic’s head of research, believes that the recent performance of housing markets was also a big part of the RBA Board’s discussion in the lead up to the decision to keep the cash rate on hold.

“The ongoing evidence of slower housing market conditions were likely one of the key topics of conversation for the RBA when they held the cash rate at the historically low level of 1.5% in September. Core Logic home value figures released last Friday confirmed that the pace of capital gains has slowed in Sydney and Melbourne,” said Lawless.

“These are the two housing markets that have caused the most concern for policy makers because of the previously high rates of capital gain that had been running since early 2012, coupled with record high levels of household debt and high concentrations of investment.”

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.