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Yesterday the Board of the Reserve Bank of Australia held a meeting regarding its monetary policy and quite expectedly a decision has been reached by the Board to maintain the cash rate unchanged at its current level of 1.00 per cent, as it was projected in our Weekly Expectations Update from earlier this week (you can read more about it here).
In the update from Monday it was reasoned that due to the subdued inflation rate in Australia in addition to the renewed escalation of trade tensions between the US and China, the Board of the RBA was most likely to remain observant of the developing situation without implementing any immediate adjustments to its monetary policy, which would have been a premature thing to do.
In its post-decision statement, the Board of the RBA commented on its final decision to abstain from changing the underlying rate by arguing that:
“The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. […] Economic growth in Australia over the first half of this year has been lower than earlier expected […] Looking forward, growth in Australia is expected to strengthen gradually from here. [source] ”
From these remarks it becomes evident that the RBA acknowledges the hampering effect that decreased investment rates have had on the economic growth thus far throughout the year, however, the central bank also expects the situation to improve henceforward, which diminishes the possibility of near-term interest rate cuts, provided that the growth projections are indeed realised over time.
The RBA has acknowledged the steady growth of the labour market over the past several years, but it is also apprehensive of the ‘little inroad into the spare capacity in the labour market recently'. Overall, the Board expects the unemployment rate to fall to 5 per cent in the following years, without any significant deteriorations from the current course of Australian employment.
In regards to inflation, the Board recognises the slow improvement of the underlying inflationary pressures; however, it is concerned with the pace at which the inflation rate is currently growing:
“The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little e above 2 per cent over 2021.”
Overall, the AUDUSD reacted to the news by breaking the 12-day downtrend and finishing Tuesday’s trading session with a 0.05 per cent gain. The pair is still trading slightly above the historically important support level of 0.67400.
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