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    Aussie jumps 1% after RBA cools on further rate cuts

    The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.75% at its policy meeting on Tuesday in a widely expected move. But in a surprise change of tone, the accompanying statement from today’s meeting was a departure from the usual language where the RBA would maintain an easing bias.

    In today’s statement, RBA Governor Glenn Stevens said “the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time”. In recent meetings, the RBA had stressed that continued low inflation would provide scope for easier policy. And this appeared to be the case last month when the RBA took markets by surprise by cutting rates for the first time in a year after inflation unexpectedly weakened in the first quarter of the year.

    The absence of fresh forward guidance in today’s meeting drove the Australian dollar sharply higher in foreign exchange markets. The aussie jumped from around 0.7365 against the US dollar to 0.7417 after the announcement. It extended its gains in European trading to climb to a one-month high of 0.7450 – up 1% on the day.

    The RBA’s apparent shift to wait-and-see mode comes after some recent solid economic indicators for Australia. First quarter growth came in very strong at 1.1% quarter-on-quarter and the trade deficit improved markedly in March and April. Other data has been a bit more concerning though. The RBA pointed to the slower jobs growth in recent months, saying “labour market indicators have been more mixed of late”. Falling business investment is also a worry for the RBA and was the weak point in the first quarter GDP reading.

    While economic growth is expected to continue at near current levels, ongoing low inflation and a sharp appreciation of the Australian dollar could yet prompt the RBA to cut rates further in the coming months. The RBA stuck to its position in today’s statement that a stronger aussie could jeopardise the “necessary economic adjustments” as the Australian economy rebalances away from mining exports. Most economists now expect one more cut from the RBA this year, most likely in August when second quarter inflation figures would be available by then.

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