Central Banks

RBA keeps interest rates unchanged, pointing to strengthening Aussie dollar, housing concerns

Key Points
  • The RBA kept interest rates on hold as was widely expected at its policy meeting on Tuesday.
  • But the central bank added that it expected Australia's economy to gradually recover.
  • The Australian dollar dropped sharply after the statement.
Dominic Lorrimer | Getty Images

The Reserve Bank of Australia (RBA) kept interest rates unchanged on Tuesday in a widely expected move, but the Australian dollar dropped as the central bank signaled that it was unlikely to raise rates anytime soon.

The Australian dollar dropped as low as $0.7601 after the data, from as high as $0.7683 shortly before the release.

The RBA said that an appreciating exchange rate would complicate the country's economic adjustment to lower levels of mining investment. The Aussie dollar was trading over $1.00 in 2013, when it reached a peak before trending lower amid a commodity slump.

In the lead up to the decision, some analysts had speculated that the RBA might follow other central banks, such as the U.S. Federal Reserve and the European Central Bank (ECB) in indicating when it would begin to exit ultra-easy policy.

But the RBA appeared to squash that speculation, keeping its benchmark interest rate unchanged at a record low 1.5 percent, and indicating a less than enthusiastic statement on the outcome. The central bank has held rates since August 2016 when it announced a 25 basis points cut in the cash rate.

"The Australian economy is expected to strengthen gradually," it said in a statement, noting that business conditions have improved and capacity utilization has increased.

But it added, "At the same time, consumption growth remains subdued, reflecting slow growth in real wages and high levels of household debt."

Gareth Aird, senior economist at Commonwealth Bank of Australia said there wasn't much new in the statement.

"I think those people in the market who are hoping or looking for the Reserve Bank to be a little more hawkish will probably be disappointed, and that's why we've seen the Aussie dollar come off," he told CNBC's "Capital Connection" on Tuesday.

"The central banks that have gone to a slightly more hawkish stance more recently, they're all at a different place than what the Reserve Bank is," he said.

The RBA also pointed to what has long been a sticky wicket for lowering interest rates further: The housing market, where easier liquidity would likely drive property prices even higher.

The CoreLogic Hedonic Home Value Index, released on Monday, showed that in the April-to-June quarter, capital city dwelling values rose 0.8 percent on-quarter and 9.6 percent on-year.

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades," the RBA said. "Growth in housing debt has outpaced the slow growth in household incomes."

Kate Kickie, Australia and New Zealand economist at Capital Economics, said in a note on Tuesday that she expected the RBA's concerns over "high and rising" household indebtedness, and the financial stability concerns that spurred, would keep the central bank on hold for a long time.

She pointed to recent first quarter data which showed that household debt had risen to 190 percent of disposable income, a new record.

"It is these financial stability concerns that make additional rate cuts look unlikely, as doing so would risk increasing household indebtedness, thereby further reducing consumers' resilience to a future income shock," she said.

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