The Reserve Bank of Australia's stance on monetary policy has not changed since May with the central bank leaving the cash rate on hold at a record low of 2 per cent.
Indeed, the decision is consistent with the market's forecasts after the Fairfax press revealed that none of the 28 economists surveyed by Bloomberg were expecting an interest rate cut today. Instead, the RBA kept the cash rate on hold as it waits for future information on economic and financial conditions to determine whether its most recent rate cut (in May) had the desired effect on the local economy.
It said that the available information suggested that the economy has continued to grow, albeit at a slower pace than its long-term average. Meanwhile, household spending and spending on dwelling construction has continued to improve and exports are rising.
At the same time, the Bank has been under considerable pressure to not lower interest rates any further as a result of soaring house prices, especially in Sydney and Melbourne. Recent data from CoreLogic RP showed that dwelling prices in Sydney had risen 15% year-over-year, with the median dwelling price now out to $752,000. The RBA said that it is "working with other regulators to assess and contain risks that may arise from the housing market."
Despite this, the Bank did leave the door open for further interest rate cuts if need be. Although the Australian dollar has retreated from its recent high levels, the board recognised that "further depreciation seems both likely and necessary" – a term borrowed from previous monetary policy announcements. While mining and non-mining capital expenditure (capex) also remains weak.
In fact, recent data from the Australian Bureau of Statistics showed that capex from the March quarter had fallen by 4.4 per cent, while estimated investment intentions for the 2015/16 financial year were just $104 billion, down 24.6% compared to the equivalent estimate for this financial year's capex.
This highlights how fragile the Australian economy is and how it is impacting consumer and business confidence levels. Further easing in interest rates may be necessary to curb this threat.
The Australian dollar rallied roughly 0.6% following the announcement, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) extended its earlier decline to trade 79 points, or 1.4% lower at 5655 points. The fall was led by the big four banks, with Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) falling 1.8%, 1.4% and 1.3% respectively, while Wesfarmers Ltd (ASX: WES) also fell by 1%.
