Cash rate on hold

The Reserve Bank of Australia (RBA) has left the official cash rate on hold for the second consecutive month.

At its board meeting earlier today, the Bank said it was prudent to leave the official cash rate at a historic low of 2.75 per cent.

The board would no doubt be comfortable with the way the economy is tracking, with capital city dwelling values climbing by 3.8 per cent over the last financial year.

While we are still a long way from the buoyant conditions we experienced in 2009, it seems the lower mortgage rates are starting to have a positive impact on the housing market.

Moving forward, we expect to see continued improvement in the housing market.

The falling Australian dollar had pushed the RBA to leave rates untouched.

The Australian dollar is starting to act as a shock absorber for the nation’s economy. On a trade-weighted basis, the dollar is now 11 per cent lower than it was in mid-April.

From the RBA’s perspective, the fall in the Australian dollar will be the key development affecting its policy view. General rules of thumb suggest that a 10 per cent depreciation could add around 0.3 to 0.4 percentage points to the consumer price index each year which, all else equal, would lift the RBA’s inflation forecasts to around the middle of the target band by end-2013.

The depreciation should also support Australia’s growth rebalancing act. In terms of the outlook for rates, much depends on where the Australian dollar settles. The recent fall in the dollar gives the RBA time to hold steady this month, but there is still some room for it to cut further if needed


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