As expected the Reserve Bank left interest rates steady yesterday, but did single out the higher value of the dollar for added comment, as some analysts had tipped it would.
And the bank left a hint in the last paragraph of its statement that it remains uncertain about the health of the jobs market and the level of domestic demand and spending by households in the light of recent figures on retail sales and building approvals.
The bank left the cash rate steady at 2% for the 11th month, as all 26 economists in a Bloomberg tipped it would.
Noting the rise in the value of the dollar – especially last week when it topped 77 US cents three days in a row in offshore trading, the RBA said, "The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”
That saw the dollar rise back over 76 US cents from around 75.80. It then sank to around 75.50 in late trading in Asia and then in Europe and the uS after traders figures the RBA could be serious.
The ASX, which had sold off in early trading as the banks tanked, fell again after a small rebound from the day’s low and ended down 1.4%, or nearly 71 points for the ASX.
The AMP’s chief economist Dr Shane Oliver said in an afternoon note that in making this statement, “the RBA has effectively reintroduced a subtle form of jawboning designed to try and push it back down again. The clear implication is that a further gain in the value of the $A could cause the RBA to act on its bias to cut interest rates again.”
He said the AMP remains of the view that “the RBA will indeed cut interest rates again in the months ahead for four reasons".
“First, growth is likely to slow back to around 2-2.5% as the contribution from housing fades reflecting falling building approvals (see the next chart) and fading wealth effects at a time when mining investment is still contracting.
“Second, unemployment is likely to remain relatively high at around 6% with jobs growth slowing.
“Third, inflation is likely to remain at or below the bottom of the RBA’s 2-3% inflation target. And finally, the recent rebound in the value of the $A is a threat to trade exposed sectors like tourism, higher education and manufacturing helping to fill the growth gap left by a slowing housing sector.
“Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the $A could set the scene for a May rate cut, which is our base case, or failing that it could be delayed into the September quarter.
"The latter, if it becomes the case, will depend on the election timing. The RBA meets on May 3, when the Federal budget could be delivered, if we are to have a double dissolution poll. The election would be only July 2, so a rate cut the following Tuesday might be a stretch. If there is no double dissolution poll, the RBA won’t cut in an election campaign with the poll expected around September 17.
"But if you look at the weakening retail sales, building approvals and a slight fall in car sales last month, and talk of weak sales growth for some retailers, then there’s the growing hint of a slowing in household spending.
"Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing. Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” (Note the last phrase and keep it in mind as the flow of figures from the domestic household are emerge.)
And also look at the continuing question by the RBA of the health of the jobs market in the other interesting phrase from the final statement: “and whether the improvement in labour market conditions evident last year is continuing". That means tomorrow week’s March jobs report assumes even greater importance.
I would argue both are more important than the comments on the value of the dollar.
