The Reserve Bank of Australia (RBA) has left the cash rate unchanged at 1.5%, a decision that surprised some economists who had predicted a cut. Governor Philip Lowe stated that the board will pay close attention to the labour market, noting that further improvement is needed for inflation to reach the target range.
The RBA acknowledged that the Australian dollar is at the low end of its recent range, which, combined with strong commodity prices, is seen as positive for the economy. However, inflation remains subdued, with underlying inflation at 1.6% annually, below the 2-3% target. The bank expects inflation to pick up gradually, reaching 2% in 2020.
Westpac analysts suggest the Aussie dollar could rise to US70.8¢ but view that level as a selling opportunity. David Bassanese of Beta Shares noted that the RBA's statement lowered the bar for a rate cut, as it now only requires the unemployment rate to stop falling rather than rise. He expects 50 basis points of cuts by late 2019 or early 2020.
Capital Economics expressed surprise at the RBA's relatively upbeat growth forecast of 2.75% for this year, maintaining a more pessimistic view on GDP, labour, and inflation. They still anticipate rate cuts in the coming months. Meanwhile, ratecity.com.au advised mortgage holders to shop around for better deals rather than wait for the RBA to act.
The ASX200 dropped after the announcement, ending the day up just 0.18%. The RBA's next meeting is scheduled for 4 June, with key data on wages and employment due in mid-May likely to influence the decision.
