Posted on March 3, 2015 by the XM Investment Research Desk at 11:11 am GMT
Having surprised with a quarter-point rate cut during its previous meeting on February 3, the RBA again delivered a surprise today by choosing to keep rates constant. Most analysts expected another rate that would lower the benchmark cash rate to 2.00%. Instead, the Bank’s policy board decided to keep rates constant at an all-time low of 2.25%.
The accompanying statement did point out that further easing might be appropriate over the period ahead. Economic growth was below trend, domestic demand remained weak and unemployment was elevated. In addition, the Reserve Bank’s statement pointed to the overvaluation of the aussie, which despite its recent decline did not reflect the weakness in commodity prices. Commodities are key exports for the Australian economy and the country’s ability to export such substantial volumes of raw materials, is key in supporting its trade balance.
One key component of the statement perhaps hinted on why the bank had chosen to stay pat. The housing market was strong and house prices – particularly in areas like Sydney – were gaining and this was something the Reserve Bank was paying close attention to. Quickly cutting rates further risked fuelling the housing market’s gains even more, which is something that is worrying the Bank.
In conclusion, the RBA, in delaying its rate cut, has probably made the aussie much more data-sensitive. Future rate decisions appear to be a close call, therefore strong or weak data could sway the committee either to cut or to keep rates the same. Volatility with a downward bias is still a very likely scenario for the aussie.
The aussie rallied to 0.7830 from around 0.7770 prior to the announcement. It subsequently backed down to 0.7805 as sellers of the aussie believe the delay in cutting rates was only temporary. The RBA will have to carefully weigh the evidence for and against a cut in coming meetings as predictions of a series of rate cuts were not realized.