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RBA leaves cash rate at 2%

RBA leaves cash rate at 2%

The Reserve Bank of Australia (RBA) today left the official cash rate at a record low 2%, but voiced concerns about the effect that recent gains in the Australian dollar might have on the economy.

Few analysts forecast a reduction to the cash rate today, with the RBA rates indicator showing only a 7% expectation of a cut to 1.75%.

The most recent rate move was a 25 basis point cut in May 2015.

Economists and analysts were keenly interested in any commentary regarding the latest appreciation of the Australian dollar against the US dollar.

In commentary released in a statement after the board meeting, RBA governor Glenn Stevens said the Australian dollar has "appreciated somewhat recently, in part reflecting some increase in commodity prices, but monetary developments elsewhere in the world have also played a role".

"Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy," he added. 

Economic activity and inflation both feed into the RBA's evaluation of the appropriateness of the official cash rate.

A lower currency might assist the rebalancing of the economy, particularly to further boost rural and services exports.

The Aussie dollar has gained about 12% from the lows seen in January this year when it was heading for US68 cents. It has since traded as high as US76.77 cents on Friday.

The local currency spiked back above US76 cents after the RBA's announcement, having fallen below US76 cents earlier today after weak economic data released by the Australian Bureau of Statistics showed trade accounts in deficit now for almost two years.

The 12-month rolling annual deficit is now $44.5bn – the largest deficit in monthly records going back 45 years, according to CommSec.

Stevens said that while commodity prices had generally increased a little recently, this followed very substantial declines over the past couple of years.

"Australia's terms of trade remain much lower than they had been in recent years," Stevens said.

He also said inflation in Australia was likely to remain low over the next year or two, and consequently, "it is appropriate for monetary policy to be accommodative".

"Low interest rates are supporting demand, while supervisory measures are working to emphasise prudent lending standards and so to contain risks in the housing market.

"Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers.

"The pace of growth in dwelling prices has moderated in Melbourne and Sydney and has remained mostly subdued in other cities."

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.