Flash Notes:RBA On Hold

The Reserve Bank of Australia (RBA) chose to keep interest rates for July unchanged at a record low of 2.0%. In theaccompanying statement, RBA Governor Glenn Stevens highlighted that “monetary policy needs to be accommodative”.

    Whilst “leaving the cash rate unchanged was appropriate at this meeting” … “information on economic and financialconditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether thecurrent stance of policy will most effectively foster sustainable growth and inflation consistent with the target”.

    It is clear the RBA wants to be on the sidelines for now to monitor the impact of the 50bps cuts already delivered this year.

    Economic data since the bank last meet has broadly been encouraging. The Australian economy grew by 0.9% q/q in thefirst three months of the year and the 42k rise in employment in May dragged down the unemployment rate from 6.1% inApril to 6.0%. Besides, the concern over the exuberance of the housing markets in Sydney and Melbourne is likely to reducethe RBA’s motivation in loosening policy further in the short-term. Prices in Sydney soared 16.2% in June from a year earlier,the fastest pace since regulators announced plans to crack down on lending.

    Although the Australian dollar has readjusted to lower levels (even plunging to new five-year lows of 0.7452 on 6 July dueto the increased threat of a Grexit and the failure of Beijing to control its stock markets), the RBA reiterated that “furtherdepreciation seems both likely and necessary, particularly given the significant declines in key commodity prices”.

    Our view has not changed materially. The wildcards would be Greece and China, though. For the former, key risks are likely tostem from the possibility of contagion into other peripheral European economies, risks to the banking sector and downsiderisks to Eurozone and global growth. As for China, the Australian economy and the Aussie dollar have been sensitive Chinesegrowth signals as the world’s second largest economy is the most important buyer of Australian mineral shipments. Shouldevents in Europe or China send the financial markets into a tailspin, the RBA may act. Otherwise, we continue to think thatthe current rate of 2.0% in the cash rate should mark the low point in this easing cycle.