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Aussie dollar rises after RBA holds cash rate

Aussie dollar rises after RBA holds cash rate

The Australian dollar gained after the Reserve Bank of Australia (RBA) held the cash rate at 1.5% and said it expected the nation’s economic growth to be around 3% over the next couple of years.

The Reserve Bank of Australia (RBA) kept the official cash rate at a historical low of 1.5% at its February board meeting, and withdrew its December comment that the nation’s economic expansion might slow by end-2016.

In a statement released today after their first board meeting this year, RBA governor Philip Lowe said an improving global economy had lifted commodity prices, "providing a boost to Australia’s national income".

“GDP [gross domestic product] was weaker than expected in the September quarter, largely reflecting temporary factors,” he said. “A return to reasonable growth is expected in the December quarter.”

The Australian dollar traded at 76.74 US cents at 3pm Sydney time, or 0.2% higher than yesterday’s close, rebounding from a low of 76.42 US cents before the release of the RBA’s statement at 2:30pm.

Resource exports

Dr Lowe said further increases in resource exports will drive Australia’s economic expansion, on expectations that the period of falling mining investment comes to an end.

“Consumption growth is expected to pick up from recent outcomes, but to remain moderate,” he said. “Some further pick-up in non-mining business investment is also expected.”

CommBank senior economist Gareth Aird said the governor sounded “relatively upbeat on the domestic economy in general”.

The governor’s comment on an anticipated increase in non-mining investment was also “a bullish statement”, Aird said, given that Australia has yet to see "a meaningful lift in private non-mining investment".

“The last RBA comment on the capex [capital expenditure] outlook was ‘subdued’. So today’s comment is a significant upgrade to what has been a weak part of the economy story,” said Aird. 

The RBA today kept its economic growth projection at about 3% over the next two years, and expects headline inflation to rise to above 2% over 2017.

Global economy

Dr Lowe said some developed economies are expected to see above-trend economic growth, although uncertainties remain.

“Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up,” he said.

He stated “there is no longer an expectation of further monetary easing in other major economies”, following rate hikes in the US.

The US Federal Reserve raised its interest rates in December 2016, a second hike in the past decade.

“In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction,” Dr Lowe said, adding that medium-term growth risks in the world’s second-largest economy remain.

Housing market mixed

Dr Lowe noted that in the housing market, conditions continued to strengthen in some areas, while in other areas prices were declining.

He added that growth in rents had been "the slowest for a couple of decades", while borrowing for housing had "picked up a little, with stronger demand by investors". 

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.