The RBA maintains its cautions outlook for the economy

The Reserve Bank of Australia (RBA) has reiterated that the most prudent course is likely a period of stability in interest rates. At its monetary policy meeting earlier this month the bank held the cash rate at a record low 2.5% for the twelfth straight month. The minutes suggest that the tone of the most recent meeting matches those of prior policy meetings.

The bank is clearly concerned about the uncertain outlook for growth in Australia, with the board noting that the hazy growth outlook is because numerous forces in the market are working in different directions. Domestic growth is widely expected to soften, after a robust performance in the first quarter. Strong growth in Q1 was driven by surging exports, but recent economic data shows a significant tapering in key commodity prices and a softer export market during Q2, thus this sector cannot be relied on for another standout performance. Also, there are conflicting messages from the broader economy, but the general theme is that of caution.

The bank also noted the recent weakness in the labour market, stating that “a notable degree of spare capacity in the labour market suggested by the relatively high unemployment rate and the participation rate being close to its lowest rate in almost a decade.” The unemployment rate jumped to a 12-month high in July at 6.4%, but the details of the report weren’t as bad as the headline number suggested (all of the losses came from part-time employment; full-time employment was actually up 14.5K over the month).

The Aussie rallies

On the dollar, the RBA maintained that the exchange rate remains at a historically high level and it’s offering less assistance to growth. Ironically, the comments weren’t as aggressive as the market expected which resulted in a surge higher in the Australian dollar. It’s worth noting that the higher the exchange rate the more the market expects the RBA to verbally assault the commodity currency. But beyond that, it’s unclear what the bank can do to have a meaningful and prolonged impact on the value of AUD (eyes on RBA Governor Stevens’ semi-annual testimony to the House Economics Committee in Brisbane tomorrow).

Source: FOREX.com