RBA to keep interest rate at 2%

The RBA lowered its key interest rate in February and May to 2% in a move to ease the structural adjustment of the economy to cope with the end of the mining boom. Although the weaker AUD is also helping, as it improves the price competitiveness of Australian companies, this is not enough from the central bank's perspective. 

In the minutes of the June meeting, it established once again that the external value of the AUD versus the country's other main trading partners is not supporting the restructuring of the economy to the extent that had been expected. Consequently, a further depreciation seems likely and necessary, especially after the sharp fall in commodity prices last year.

"We believe the RBA will limit itself next week to verbal objections against what it sees as an overly strong AUD and will leave the key interest rate at 2%", says Commerzbank.

Since the last meeting, the data have essentially confirmed its picture of a moderately growing, but still under-utilised, economy. Furthermore, the labour market situation has improved slightly in the past six months. 

Finally, the persistent risks on the housing market argue against even lower interest rates. Instead, the RBA is likely to pin its hopes regarding the AUD on Fed interest rate hikes, which is expected to start from September, added Commerzbank.