The Reserve Bank is sticking to its plan to keep interest rates on hold, but a resurgent Australian dollar is undermining its efforts to keep economic growth on track.
The central bank kept the cash rate on hold at 2.5 per cent at its April meeting, as expected, and Governor Glenn Stevens said it expects of “a period of stability in interest rates”.
The use of that statement for a third month was designed to help boost consumer and business sentiment, CMC Markets chief market strategist Michael McCarthy said.
“This is an attempt to bolster confidence giving businesses and consumers something to lean on,” he said.
Economists said the comments from the RBA accompanying its decision were almost identical to those issued a month earlier, with one notable change.
In March Mr Stevens said the fall in the Australian dollar would help boost economic growth, but on Tuesday he suggested recent rises in the currency would diminish that outlook.
“The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months,” Mr Stevens said.
The Australian dollar has risen from a low of under 87 US cents in January to close to 93 cents on Tuesday, but remains well below the $US1.06 it was trading at a year ago.
JP Morgan economist Ben Jarman said Mr Stevens’ statement showed the Australian dollar wasn’t doing what the RBA needed it to do, as it attempts to boost underperforming sectors of the economy to offset declining mining investment.
He expects the RBA to start talking the Australian dollar down if the currency continues to rise.
“That’s a space to watch, if it keeps going up they’ll have to start jawboning it again.”
UBS economics Scott Haslem and George Tharenou said Mr Stevens’ statement also showed little concern for rising house prices.
“For now, the RBA appears unfazed by the recent `heat’ in housing,” they said.
Most economists saw nothing in the latest comments from the RBA to change their forecasts for the cash rate.
The next move is widely tipped to be a rise, which most economists expect will come in early 2015.
The median forecast for the cash rate at the end of 2015 is 3.25 per cent.