Australian Dollar Rises After Chinese PMI Beats, RBA on Deck

Table 12

In his monetary statement accompanying the RBA's decision to keep the cash rate on hold at 1.5 per cent yesterday, Mr Lowe devoted a paragraph to the recent appreciation of the Australian dollar.

But he warned that recent rise in the Australian dollar "is expected to contribute to subdued price pressures in the economy" as well as "weighing on the outlook for output and employment".

The unemployment rate is expected to decline a little over the next couple of years. The economy is nearly out of the reversal of mining investment that had been weakening growth of late - another bonus.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending".

The Australian dollar was buying roughly 80.2 U.S. cents before Governor Lowe issued the strongly-worded statement.

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According to data compiled by IHS Markit Britain's Manufacturing PMI jumped from 54.2 to 55.1 in July, rallying from a notable drop in activity in June and beating expectations of only a 0.2% rise.

Despite the bank's concern over recent strength in the Australian dollar, the broader economy has improved in recent months.

He said Dr Lowe's reference to higher commodity prices against the backdrop of expected weaker terms of trade also indicated the RBA was unconvinced a recent bounce in commodity prices was sustainable. "But, for now, policy still seems set to remain on hold", said Lloyds Commercial Banking's, chief economist, Rhys Herbert, who forecasts a 6-2 split in favour of keeping interest rates unchanged.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through.

The Reserve Bank signalled that it was not particularly anxious about housing prices, saying they were rising briskly in some markets, albeit more slowly.

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"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years", Lowe said.

A higher exchange rate means both its exports comparatively more costly.

The jump appeared to be largely driven by increased foreign demand for British goods as the weaker Pound makes good produced in the United Kingdom more attractive to overseas buyers.

And he did point to the disturbing trend that "growth in housing debt has been outpacing the slow growth in household incomes".

The RBA also remained fairly neutral in its outlook for future growth as it said "forecasts for the Australian economy are largely unchanged", which would suggest that the bank's quarterly Statement on Monetary Policy (SoMP) on Friday will not deviate greatly from the RBA previous forecast of 3% annual growth.

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