By MALCOLM MAIDEN
The Reserve Bank still thinks the Australian dollar is higher than it should be. Overall, however, it seems very confident that its decision to keep the cash rate on hold at 2.5 per cent for the 10th consecutive meeting is the right one.
The picture it paints of an economy slowly but methodically shifting from over-reliance on the resources boom to a more balanced growth model is essentially unchanged from a month ago, and so is the underlying positive message for the markets: central banks including our Reserve Bank are underwriting market prices with easy monetary policy, and there’s no sign yet that they are about to put the brakes on.
The Australian dollar was trading at US86.7¢ at the end of January. On June 2, ahead of RBA’s June 3 rates meeting, it was changing hands at US92.6¢.
It jumped from US94.2¢ to US94.5¢ on Tuesday afternoon after the RBA emerged from its July meeting and declared that the cash rate was still on hold at 2.5 per cent.
At its June meeting, the Reserve noted the strength of the $A. After falling from $US1-plus last year, the currency was assisting with the rebalancing of the economy, but by less than it was before its mini-rally this year, the central bank said last month, adding that the exchange rate remained high by historical standards, particularly given further declines in commodity prices.
In its latest statement it says much the same thing. But there is a hint of impatience in its comment that the $A is high given commodity price weakness “and hence is offering less assistance than it might in achieving balanced growth in the economy”.
Still, overall, the RBA’s view is sanguine.
Financial conditions overall remain very accommodative, it says, and long-term interest rates and risk spreads remain low. Emerging market economies are once again getting investor attention, and marklet volatility is unusually low.
Its conclusion, as it was last month, is that investors are attaching “a very low probability to any rise in global interest rates over the period ahead”.
This market and global markets are unlikely to crack until that stops being the case.