Economic Analysis: Australia Leaves Rates As Is… but

A short time ago, the Reserve Bank of Australia (RBA) announced they would leave its key interest rate at the record low of 2.5 percent. There has been no change since it was set at this level last August.

The RBA, after the rate announcement said that recent data shows that there is some modest growth occurring with Australia’s economy. Resource spending is falling sharply but investment outside the important mining sector is getting better. Overall they expect the gross domestic product (GDP) to grow below its trend for 2014 into 2015.

Just ahead of this news, the Australian dollar lost just over 0.3 percent versus the U.S. dollar but the equities markets shrugged this off. There was no change, equities are quite happy, well maybe a bit indifferent, with that outcome. The RBA is correct with where their economy is going. Consumer confidence numbers have bounced back, shrugging off concerns and we are seeing service related investments begin to pick up the slack from the loss in the mining sector.

The central bank said the wisest course should be one of rate stability. There is some concern over the weakening property market in China, which should pose near term challenges. As far as their currency is concerned, they remain unhappy with its current high level and mentioned they think it is still overvalued at this price level and well above its fundamental value. The RBA is aiming to put a stop on the Aussie dollar every so often, but they are more concerned with the interest rate differential. Especially compared to other countries as it remains very high.

The Aussie dollar has been on a rather good run throughout this year. We have seen the currency gain nearly four percent against the U.S. Dollar and it has now reached a 15 month high versus the yen.

Looking towards Wednesday, Australia will release its second quarter GDP number. We are expecting an expansion of 0.4 percent quarter on quarter. This is below the 1.1 percent growth we saw in the first quarter of this year. The annual growth rate is also expected to slow from 3.5 percent to around three percent, barring any surprises lower with Wednesday’s release.

Bottom line the RBA will stay put with rates and monetary policy for quite some time. The term “period of stability in interest rates” has been dropped and rates are on hold for now. Once we see this change, we expect rates to be raised, but this will not happen till several months after we start hearing a change in communication. Rates will remain pat until at least March of 2015.