The local dollar AUD=D4 edged up after the Reserve Bank of Australia (RBA) ended its first policy meeting of the year by stating there were reasonable prospects for continued economic growth at home despite global headwinds.
A Reuters poll of 32 analysts had found all expected no change this week, while the market is still pricing in an easing by mid-year.
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KEY POINTS:
* RBA holds its cash rate at 2 pct. It last cut in May 2016
* RBA says continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.
* At today's meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target.
* Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand
* The exchange rate has continued its adjustment to the evolving economic outlook.
* Text of the statement can be found on RBA01 or by double-clicking on.
The Reserve Bank's Web site is at: www.rba.gov.au/
COMMENTARY:
TOM KENNEDY, ECONOMIST, JPMORGAN:
"A lot of the language is pretty similar to what we saw in the final quarter of last year. They did acknowledge financial market concerns but I don't think there is any near-term implications for monetary policy. We think the RBA is likely to remain on hold this year. The risk is they have to ease, but it is very much data driven."
MICHAEL TURNER, STRATEGIST, RBC CAPITAL MARKETS
"There is a slight dovish tilt. There is a clear focus on what global growth prospects are doing.
We have a March interest cut and it's not something we'll change on the back of the statement. We also see another cut later in the year."
MICHAEL BLYTHE, CHIEF ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA:
"I'd say the conditional easing bias continues, but one of the conditions for a rate cut now is whether what's happening in the rest of the world impacts us in any real sense. They sound more upbeat on the domestic economy...but the rest of the world, we need to wait and see just how that story plays out over the next few months."
MARKET REACTION:
The Australian dollar AUD=D4 edged up slightly on the statement. Interbank futures <0> eased a touch as investors lengthened the odds a little on a future easing in rates.
BACKGROUND:
- Having played down the need for an easing in December, analysts assumed it was too soon for the RBA to change its tune at this meeting
- The central bank has long been reluctant to ease any further, in part for fear of inflating a housing bubble, and prefers stimulus to come from a weaker currency.
- The transition from mining to service-led growth seems to be continuing. Data have shown surprising strength in employment, solid consumer spending and hints of a pick up in business investment.
- Yet there are plenty of downside risks. Sliding commodity prices have hammered Australia's terms of trade, the outlook for the Chinese economy remains uncertain and recent volatility in world markets has bruised consumer confidence.
- With underlying inflation running at 2 pct, the floor of the RBA's target band, there is room to ease further but not necessarily the trigger.
By: Reuters (Sydney).
Reporting: Wayne Cole.
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