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Australian dollar gains after RBA cash rate call

Australian dollar gains after RBA cash rate call

The Reserve Bank said Australia's economic growth is expected to increase to slightly above 3% over the next two years.

The Australian dollar strengthened after the Reserve Bank of Australia (RBA) maintained its forecasts for the nation's economic growth, as its board kept the official cash rate on hold at 1.5%.

In a statement issued after the board's monthly meeting, RBA governor Philip Lowe reiterated that the Australian economy could gradually expand over the next two years to slightly above 3%.

"Inflation picked up to above 2% in the March quarter in line with the Bank's expectations. In underlying terms, inflation is running at around 1.75%, a little higher than last year," he said.

"A gradual further increase in underlying inflation is expected as the economy strengthens," he added.

The central bank has been keeping a preferred inflation rate of 2% to 3%, with a view that this range will help keep the economy running smoothly.

The Australian dollar traded at 75.52 US cents at 2:40pm Sydney time, up from 75.41 US cents minutes before the central bank released its announcement at 2:30pm.

Dr Lowe noted a broad-base growth in the global economy since last year. As for Australia, he said growth in consumption is expected to remain moderate.

"Non-mining investment remains low as a share of GDP [gross domestic product] and a stronger pick-up would be welcome," he stated.

Craig James, chief economist at CommSec, said the RBA's view on the local economy meant that a reduction in the cash rate is "off the agenda" this year, although rate hikes are not on the cards either.

"The next move in interest rates is more likely to be a rate hike than a rate cut. But in our view, policy settings are unlikely to change over 2017, so any rate hike is still some way off," said James.

"So for now the Reserve Bank is happy with where the economy is, and where it is going," he said.

The cash rate has been at a historic low of 1.5% since August 2016. Today's rate decision was widely expected, as the Australian Securities Exchange RBA Rate Indicator showed that financial markets priced in a 98% chance of no change.

Dr Lowe's comments on Australia's labour and housing markets were largely unchanged from last month.

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.