Rates on hold, future uncertain

Yesterday’s decision by the Reserve Bank of Australia to leave the cash rate unchanged apparently stunned many market watchers. In a survey undertaken by business news agency Bloomberg, 24 out of 27 macroeconomists reckoned the RBA would cut rates by 25 basis points. Why were so many ‘informed’ analysts left with egg on their face?

As Alan Kohler writes, a pure analysis based on the core economic indicators would suggest the RBA’s call was inevitable. Inflation is moderate (the key target for the central bank), unemployment is low, and Australia’s economy is growing. But Kohler also notes that there are serious concerns about the economic health of the retail and manufacturing sectors, which loom large on the east coast. And storm clouds from overseas — both Europe and the United States — still linger on the horizon.

In the mean time, the RBA’s decision will likely mean overseas investors continue to park their capital in Australia. Indeed, in the immediate wake of the RBA’s non-decision, the Australian dollar shot up against major currencies — it’s now worth 1.08 US dollars. Perhaps to the chagrin of exporters and domestic import-competing industries, the Aussie’s strength continues to provide a moderating influence on inflation — making future rate cuts even less likely. But that’s no guarantee: most analysts still expect the cash rate to go down in the near term. Then again, they thought the same about yesterday.