RBA leaves cash rate at 4.50%

Despite wide spread expectations the RBA kept rates on hold yesterday regardless of the strengthening local economy and strong Asian commodities demand driven terms of trade. Underlying inflation appears to be the reason for the stance, as it has remained steady at around 2.75% over the past year. In light of this, we are still expecting a rate rise next month unless there are any surprises with the CPI release on the 28th of October. Capacity constraints are still likely to place pressure on inflation in the medium to long term. So once again the question is not if, but when. The RBA stated yesterday that “if economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target”.

Also released yesterday were retail sales for August, remaining steady at 0.3%, just below the 0.4% median and appears to be consistent with long run averages. The trade balance was up in August with a surplus of $1.7bn, which was an increase of $2,348mn on the previous month. ANZ job ads were also released with mixed results, as internet ads were up 0.7% and newspaper ads falling by 1.9% (Continuing long term trend).

In summary, global concerns over debt in Europe and the degree of uncertainty throughout the northern hemisphere appear to have softened the RBA’s outlook. However, the Australian economy appears to remain strong, with the mining sector leading the way as demand from Asia continues to push commodity prices higher. With falling unemployment and the economic growth within the local region make it unlikely we will have to wait until February to see the cash rate rise.

Consequently rates have dropped across the curve - about 15 points in the short and around 10 points in the longer end.