RBA warns high dollar may slow growth

RBA warns high dollar may slow growth

The main event this week is the Reserve Bank of Australia (RBA) rate meeting out at 5.30 BST on Tuesday morning, August 1.

An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than now forecast, the bank said. The local unit was trading around 76.4 USA cents when the RBA released its last rate decision in early July.

The only real question is by how much. "With inflation low and particularly wages growth very low, there is no need to raise rates for at least two years".

The Reserve Bank has left the cash rate at 1.50 per cent.

"It is clear that the RBA harbors some concerns about the consumer outlook and the slow pace of wage rises, despite its constructive views on employment", said Citi economist Paul Brennan.

The AUDUSD has appreciated by more than four per cent in July alone.

"The higher exchange rate is expected to contribute to subdued price pressures in the economy", Lowe said in his statement, the longest since 2013.

"The Australian dollar above A$0.80 looks expensive, but without action from the central bank, yield differentials will continue to be the primary driver for the currency pair", said Hussein Sayed chief market strategist at FXTM.

Whether that will translate to a specific change in the bank's commentary on the Aussie remains a hot talking point across markets.




The RBA has expressed increasing concern that the Australian dollar, which recently topped its highest levels against the USA dollar in more than two years, has become a potential brake on growth.

The central bank's monetary policy statement is due 12:30pm HK/SIN.

"The low level of interest rates is continuing to support the Australian economy", Lowe said in his concluding paragraph.

The central bank has supported regulators' moves to strengthen home-lending standards and prevent the use of interest-only loans by owner -tenants and investors.

Although the headline CPI figure was weak, the bank may mention that underlying inflation was broadly in line with the forecasts it offered in its May SoMP.

The governor noted jobs growth has been stronger over recent months and was expected to continue strengthening but said wages growth remains low and is expected to stay that way for some time. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease.

The market had priced in a zero possibility of a rate change into its calculations. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness.

Core inflation - the main focus for policymakers - has remained below the RBA's target band since early 2016, prompting it to lower interest rates twice previous year.

"Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time", the bank said in a statement.

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