No change in rates from the Reserve Bank yesterday and later today we get the first major update on how the economy performed in May with retail sales and trade data all due for release.
In fact it was a ‘steady as she goes‘ type of statement from the central bank which confirmed the feeling in the markets that the bank won’t be cutting for a while, as it watches how the economy tracks in the next few months.
The economy is now entering its most testing period for a couple of years with the slowdown in China pressing on sentiment, the transition of the economy from mining led investment to a broader based domestic upsurge.
"Our terms of trade will fall further this quarter and next because of the containing weakness in commodity prices, which the 10% fall in the value of the dollar has mitigated, but not offset," the bank said.
The Australian dollar was trading at 92.23 USc just before the statement was released at 2.30 pm. It rose a touch, then fell half a cent to 91.70 USc as traders realised the chances of another cut from the central bank remains uncertain. The dollar traded around 91.40 US cents this morning.
Wall Street fell after being higher in early trading. Gold dipped as the short covering surge from Monday dissipated.
But oil continued to rise, closing just under $US100 a barrel in New York, the highest close for nearly 14 months. That, plus the lower dollar, will have an impact on inflation in the current quarter.
The rate decision and a sense of embarrassment about Monday’s big sell-off, saw the local stockmarket surge by 2.6% or over 123 points. Shares rose across the board and those fears about the health of the Chinese economy were forgotten. Odd that wasn’t it.
Wall Street’s fall will nip that bit of exuberance in the bud this morning.
The key part of the statement, the final paragraph where the bank signals its views on the appropriateness of monetary policy, was unchanged from the June statement, reading:
"At today’s meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand."
The statement made mention of the weakness in markets since the Fed meeting late in June. "Globally, financial conditions remain very accommodative. However, a reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels. Volatility in financial markets has increased and there has been some widening of credit spreads."
But there was no mention of the impact of the credit crunch in June in China, or the slowing in the pace of activity in China since the last RBA board meeting.
2Y Interest Rates – RBA Holds
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The rest of the RBA statement read:
"Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined further but, overall, remain at high levels by historical standards. Inflation has moderated over recent months in a number of countries.
"In Australia, the recent national accounts confirmed that the economy has been growing a bit below trend over the recent period. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher over the past year and growth in labour costs has moderated. Inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years, notwithstanding the effects of the recent depreciation of the exchange rate.
"The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.
"The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."
The dollar’s 10% slide seems to have helped make up the RBA’s mind – but so would have the still uncertain direction of the economy.
