RBA keeps cash rate on hold; likely to ease policy in August

The Reserve Bank of Australia today kept the cash rate on hold at 1.75%, on par with expectations. The central bank did not give any clear guidance about the future direction of monetary policy. The RBA is quite certain that the shift to non-mining activity is continuing. However, it continues to be concerned regarding low inflation.

The central bank not providing a forward guidance signifies that a reduction in rate in August is a much closer call, said ANZ in a research report. The degree of the downgrade to the central bank’s inflation projection and continuing downward pressures on price imply that the RBA will lower rates again in August, added ANZ.

The RBA was quite encouraged by the strong economic growth data for the first quarter. RBA Governor Glenn Stevens said in a statement that in spite of huge decline in business investment, “other areas of domestic demand, as well as exports, have been expanding at a pace or above trend”. The central bank is quite optimistic of the labor market as well.  Glenn Stevens stated that the indicators for the labor market “have been more mixed of late, but are consistent with continued expansion of employment in the near term”.

However, the RBA is worried about low inflation. It projects inflation to remain low for some time, given the weak labor costs growth and quite low cost pressures elsewhere in the world. The subdued outlook of inflation is likely to dominate the outlook of monetary policy, according to ANZ. The huge downgrade to the central bank’s forecast inflation profile, signifies that the RBA will be required to further ease its policy, added ANZ.

Meanwhile, the central bank was quite calm regarding the latest surge in housing prices. According to the bank, a likely increase in supply will keep the prices in check and noted that standards of lending had strengthened.