Interest rates look set to stay put while the Reserve Bank waits to see what effect the stubbornly high currency will have on Australia’s economic growth.
The minutes of the RBA’s April meeting, released on Tuesday, show it believes the most prudent course is for “a period of stability in interest rates”, after leaving the cash rate at a record low 2.5 per cent.
“The board’s judgment was that monetary policy was appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the two to three per cent inflation target,” the RBA said.
“The board had judged that it was prudent to leave the cash rate unchanged and members noted that the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected.”
HSBC chief economist Paul Bloxham said a rate hike was likely to be on the cards in 2014, as the central bank was seeing early signs of a rebalancing in economic growth.
“With the rebalancing of growth away from mining investment on track in Australia, we continue to expect that the RBA’s easing phase is done,” Mr Bloxham said.
“Given that the labour market appears to be improving faster than the RBA had expected, we think rates could also have to rise a little earlier than current market pricing, with a hike before year end our central case.”
The RBA said falling mining investment and weak public demand would constrain growth for some time, but there were “early promising signs” in other parts of the economy.
“A strong pick-up in dwelling investment was in prospect and there was some evidence that consumer demand had strengthened a little,” the RBA said.
“Indicators for exports remained strong, while those for business conditions were generally higher than they had been in 2013.”
However, the stubbornly high Australian dollar would dampen economic growth, it said.
“While the decline in the exchange rate from its highs a year earlier would assist in achieving balanced growth in the economy, this would be less so than previously expected given the rise in the exchange rate over the past few months,” the RBA said.
JP Morgan chief economist Stephen Walters said the RBA’s reluctance to jawbone the Australian dollar was “somewhat puzzling”.
“The Australian dollar at these levels is creating problems for policymakers and firms alike,” Mr Walters said.
“The Australian dollar merely is described today as `high by historical standards’.
“As jawboning goes, this is pretty lame, particularly as the divergence between the Australian dollar and commodity prices is widening.”