As expected the RBA left interest rates unchanged at 3.5% noting that economic growth has remained close to trend requiring little need to adjust monetary policy for the time being. In its monthly statement the RBA indicated that global growth in the second half of the year has slowed due to concerns over the sovereign debt crisis in Europe and will likely “ grow at no more than average pace in 2012”.

However, the Australian central bank saw no other serious risks to the global economy pointing out that while “China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further.”

The Australian monetary policymakers also stated that the recent easing campaign by the central bank which saw rates decline by 75 basis points since April is starting to have a positive impact on economic activity in Australia as “dwelling prices have firmed a little over the past couple of months, and business credit has over the past six months recorded its strongest growth for several years.”

Overall RBA assessment of the state of the economy was generally upbeat and should be viewed bullishly by the market suggesting that rates will likely remain on hold for the foreseeable future. The one caveat to that scenario was RBA’s concern over the strength of the currency which may prompt the authorities to consider additional rate cuts if the AUD/USD rallies higher. However, we do not believe that the RBA will move to lower rates unless the AUD/USD rises to 1.10 level.

The Aussie took out the barrier at 1.0600 rising to a four and half month high of 1.0603 in the aftermath of the release as traders bought on the positive tone of the statement. Since then the pair sold off a bit as profit taking kicks in, but could make another run through the 1.0600 figure later in the day if risk sentiment remains positive.

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