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RBA Leaves Rates Unchanged, Sounding Optimistic

07 June 2017

Most economists expect the RBA to hold or increase rates over the next year even as market bets for further easing creep higher amid a cloudier outlook.

The Reserve Bank of Australia (RBA) chose to keep the country's cash rate unchanged at 1.50 percent on Tuesday, citing slow wage growth and variations in the housing market. Projections for tomorrow's first quarter GDP report are for a 0.2% quarter-on-quarter growth.

The cash rate has been on hold for 10 consecutive months since August a year ago, when the RBA slashed rates to combat weaker-than-expected inflation.

Governor Philip Lowe said growth was still expected to accelerate above 3 percent in the next couple of years despite probably slowing in the March quarter, citing a broad-based pick-up in the global economy alongside a local improvement in jobs and non-mining investment. Underemployment is keeping a lid on wage pressure, with Lowe noting that growth in total hours worked remained weak.

A big unknown is household consumption which surprised with its strength late in 2016, but is being burdened by record-low wage growth and high levels of mortgage debt.

The Australian dollar has climbed on the announcement, rising to 74.85 USA cents by 2.38pm AEST, having earlier fallen to a low of 74.57 USA cents on weaker than expected national exports data.

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Wide variations in the housing market have also contributed to uncertainty in the economy.

Dr Lowe said the housing market appeared to be cooling, with conditions starting to ease in markets where prices have been briskly rising, a reference to Sydney and Melbourne. Inflation is forecast to increase gradually as the economy strengthens.

The more house prices calm down, the more room the RBA has to cut rates by minimising the risk of stoking the market. Still, the RBA may be willing to look past a soft performance in the early part of 2017, mindful of some temporary weather-related factors.

"If this recent slowing develops into a more sustained trend, the Reserve Bank may be able to consider alternative scenarios to a steady cash rate", said CoreLogic's head of research, Tim Lawless.

Over the last month, financial markets have nudged higher bets on a rate cut by the end of the year to a probability of around 20%. According to market forecasts, the Australian economy grew 0.2% in the first quarter, compared to the preceding quarter's expansion of 1.1%.

RBA Leaves Rates Unchanged, Sounding Optimistic