THE TAKEWAY: RBA kept rates unchanged at 3.50% > Economic growth appears to be moderating at a sustainable pace > Australian Dollar little changed
The Australian Dollar was little changed as the Reserve Bank of Australia kept the benchmark lending rate unchanged at 3.50%. According to RBA Governor Glenn Stevens, global growth is expected to push forward at a “no more than average pace” for the remainder of the year. Moreover, the release suggested that China, which is Australia’s largest trading partner, should continue to experience growth which has “moderated to a more sustainable pace.”
It’s likely that Europe continues to pose the greatest risk to financial shocks, however markets have responded well to recent developments. Europe is a large trading partner with China and if the Eurozone slowdown accelerates, then the spillover effect may result in a stagnant Chinese manufacturing sector which invariably could cause a drop in Australian exports.
The RBA last reduced their rate in May of this year. The effect of an interest rate cut should generally take a few months to produce a result, so it’s not much of a surprise that the rate decidedly remained unchanged. If the RBA cuts too aggressively, then prices may accelerate to uncomfortable levels, thus exerting pressure on officials to tighten by increasing the cost of capital. The Aussie currency is already an attractive pair to hold since it yields a high rate of return and the prospect of a higher, and thus more attractive, yield could cause in influx of foreign capital into the Australian system potentially driving the exchange rate higher. Furthermore, a higher exchange rate is likely to weigh on exports since goods become relatively more expensive when settling transactions.
So for now, it’s of little surprise that the RBA played it safe and will most likely wait for further economic developments to play out. Markets likely interpreted the decision to mean that little has changed and will probably also wait for the cues that could lead towards more attractive trading conditions.