The Australian dollar jumped after the decision by the Reserve Bank of Australia (RBA) to leave rates unchanged. In the meeting that ended earlier today, the bank left rates unchanged at 1.50% and pointed that the expansionary monetary policy will continue for the foreseeable future. In the accompanying statement, the RBA governor, Philip Lowe said:
“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
The Australian economy is growing with high levels of vacancy rates. Forward indications point to a period of sustained low interest rates. The GDP for 2018 and 2019 is expected to average slightly above 3 per cent. The business environment in the country is positive with increased improvements in the business confidence levels. The investments by non-mining companies is increasing, which is leading to more jobs in the beleaguered industry.
In the past month, the country has reported improved data. The retail sales for the month of May increased by 0.4%, which was better than the expected 0.3%. In June, the employment change was 50.9K, which was better than the expected 16.7K while the participation rate improved to 65.7%, which was better than the expected 65.5%. The unemployment rate remained at 5.4%. The building approvals in March increased by 6.4%, which was better than the expected 1.1%.
A few data pieces showed some weaknesses which was addressed by the RBA. The PPI for the second quarter rose by 0.3%, which was lower than the expected 0.3%. The Consumer Price Index (CPI) for the second quarter rose by an annualized rate of 2.1%. This was lower than the expected 2.2%. On a MoM basis, the CPI for the second quarter rose by 0.4%, which was lower than the expected 0.5%.
The Australian economy has also faced a major challenge related to the climate. The Southern region of Australia is experiencing a major drought. By some estimates, this is the worst drought in the country’s history. Yesterday, the prime minister said, ‘now, we are the land of droughts’, an indication of the current problem. The drought has led to increased funding by the government to fight the draught. This year, the government has spent more than $156 million on this.
As with all the recent statements by the RBA, the officials have expressed caution on the current housing crisis in Sydney and Melbourne where house prices have been falling. They are falling because of overcapacity and the limited demand for the houses.
The Australian dollar rose to an intraday high of 0.7420 after the statement. Traders are optimistic that the bank will start normalizing in the first half of the coming year.