Australian dollar slips despite Reserve Bank of Australia keeping rates on hold

Australian Dollar

The Reserve Bank of Australia kept interest rates on hold at a record low of 1.5 percent on Tuesday, but the Australian dollar slipped as the balance of risks appeared to shift.

The central bank had been widely expected to keep rates unchanged, remaining stuck between the rock of rising housing prices and the hard place of a higher jobless rate.

Analysts were very certain the RBA wasn't changing policy, but Paul Dales, chief Australia economist at Capital Economics, noted that the RBA's rhetoric had shifted subtly.

That was likely the driver of the Australian dollar's drop, from around $0.7607 before the decision, to as low as $0.7569 afterward.

In the statement accompanying the decision, RBA Governor Philip Lowe said that recent economic data were consistent with continued moderate growth.

"Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year. At the same time, some indicators of conditions in the labor market have softened recently," he said, noting wage growth remained slow.

Last week, the Australian Prudential Regulatory Authority (APRA) asked banks to limit the amount of new interest-only loans. Recently, some banks have also raised their mortgage rates on property investment loans.

As that risk faded, Dales expected the RBA would turn to other concerns.

"The economy is not strong enough to raise underlying inflation to the 2-3 percent target or to significantly lower the unemployment rate. At the least, this will prevent the RBA from raising interest rates either this year or next. In fact, we still believe it may prompt it to cut interest rates to 1.0 percent later this year."


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