The Reserve Bank of Australia kept its key lending rate unchanged at 2.00 percent and dropped some dovish language from its official statement.
The Aussie dollar has depreciated about 30 percent against the U.S. dollar since early 2012 and the RBA has noted that decline and its impact on inflation and the terms of trade. Regarding the outlook for prices, the RBA noted the slow growth in labor costs in the context of the weaker currency and judged that inflation pressures are contained. Due to restrained labor cost pressures, inflation is forecast to “remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Over the past several months, lower crude oil and commodity prices have pulled down the rate of CPI inflation in Australia. In its official statement, the RBA noted the influence of lower commodity prices and identified the shift as a function of increased supply partly attributable to activity in Australia saying “…some key commodity prices are much lower than a year ago. Much of this trend appears to reflect increased supply, including from Australia.” While headline CPI inflation was a bit lower than consensus expectations in Q2, and core inflation readings were benign, those core inflation measures remain modestly above the bottom end of the central bank’s 2-3 percent medium-term inflation target range.
Later this week, the July employment report will offer the latest read on the Aussie labor market. The RBA announcement today noted that while headline employment growth has been below long-term averages, we have also seen stronger growth in employment and a stable unemployment rate. The June print for unemployment was 6.0 percent, a bit above the 5.5 percent average rate since 2000.
Move Puts a Bid on the Australian Dollar
The Reserve Bank of Australia (RBA) left its overnight lending rate unchanged at 2.00 percent, but it dropped a key phrase describing additional Aussie dollar depreciation as being “both likely and necessary”. That exclusion was taken by some market participants as an indication that further rate cuts are less likely and the RBA may be prepared to hold rates steady for longer. This development is supportive of the domestic currency which rallied more than 1.5 percent after the announcement.The Aussie dollar has depreciated about 30 percent against the U.S. dollar since early 2012 and the RBA has noted that decline and its impact on inflation and the terms of trade. Regarding the outlook for prices, the RBA noted the slow growth in labor costs in the context of the weaker currency and judged that inflation pressures are contained. Due to restrained labor cost pressures, inflation is forecast to “remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Over the past several months, lower crude oil and commodity prices have pulled down the rate of CPI inflation in Australia. In its official statement, the RBA noted the influence of lower commodity prices and identified the shift as a function of increased supply partly attributable to activity in Australia saying “…some key commodity prices are much lower than a year ago. Much of this trend appears to reflect increased supply, including from Australia.” While headline CPI inflation was a bit lower than consensus expectations in Q2, and core inflation readings were benign, those core inflation measures remain modestly above the bottom end of the central bank’s 2-3 percent medium-term inflation target range.
Consumer Spending Should Be Supportive of Q2 Growth
The rate decision announcement from the RBA comes sandwiched between two other key economic releases this week. Earlier in the same day, we learned that retail sales for June were stronger than expected. Not only was the 0.7 percent monthly gain better than the 0.4 percent increase that had been expected, the prior month’s increase was revised higher as well. For the second quarter as a whole, real retail sales grew 0.8 percent (not annualized) which bodes well for consumer spending being supportive of Q2 GDP growth.Later this week, the July employment report will offer the latest read on the Aussie labor market. The RBA announcement today noted that while headline employment growth has been below long-term averages, we have also seen stronger growth in employment and a stable unemployment rate. The June print for unemployment was 6.0 percent, a bit above the 5.5 percent average rate since 2000.
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