Australian Dollar Rescued, But Not For Long

The Australian dollar is trading higher today after a shock decision by the Reserve Bank of Australia to keep interest rates on hold today at 2.25%.

At 9.20pm (AEDT) the Australian dollar was trading at US78.22c up from 78.06c at yesterdays close.

Most analysts before the decision had expected the central bank to cut rates again, following up from the reduction in February to bring the benchmark rate to a record low of 2.00%.

One of the deciding factors may have been the current state of the housing market which is sitting at record levels and the central bank may have been afraid to add fuel to the fire.

Although the RBA kept rates on hold Governor Glen Stevens noted that the currency remains overvalued, particularly when you take into consideration the fundamental factors and noted,
“The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy”.

Leaving the door open for further rate cuts he also noted that a close eye will be kept on inflation, with measures taken in order to reach the bank’s target rate,

“At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings”.

Australia and New Zealand Banking group chief economist Warren Hogan noted that the bank would probably move on rates in April to cover for the lack of non-mining investments flowing into the economy.

"A sustained non-mining recovery remains elusive, dependent on new investment outside of the property and construction sectors," he said.

"Over the medium term, the currency is critical and there is little evidence that it is having the desired positive impact on investment decisions and employment as yet."