RBA holds rates, Australian dollar rises on upbeat policy tone

Australia’s central bank has kept interest rates steady, with its slightly more upbeat stance on the domestic labour market helping send the Australian dollar higher.

The Reserve Bank of Australia held rates steady at a record low 1.5 per cent, as expected by economists.

Policymakers struck a somewhat more optimistic tone on the outlook for the labour market, which has been in focus all this year.

Although conditions have been mixed, the Board added today it expected the “unemployment rate to decline gradually over time”, but wage growth was likely to remain slow “for a while yet”. Last month, the RBA said nothing of its expectations for the direction of the unemployment rate and simply stated wage growth remained slow.

While the central bank continues to wrangle the domestic housing market, recent data showed annual headline inflation rose in the March quarter to within its 2-3 per cent target range for the first time since 2014.

The Bank said today “a gradual further increase in underlying inflation is expected as the economy strengthens”. That compares to April’s policy statement, as well as the minutes from that meeting, when it said it expected the recovery in underlying inflation to be a “a bit more gradual”, owing to subdued growth in labour costs.

The solid March quarter inflation figures, though, have now prompted a number of economists to scale back predictions for further interest rate cuts.

Australian regulators have recently clamped down on interest-only loans in an effort to cool frothy housing prices, while commercial banks have also raised interest rates for such borrowers. The RBA last month said a reduced reliance on such loans in the domestic housing market “would also be a positive development”.

The market has extracted a more positive tone from the RBA’s commentary, and pushed the dollarydoo 0.4 per cent higher to $0.7551.