Trade Resources Market View Reserve Bank's Decision to Keep Rates on Hold

Reserve Bank's Decision to Keep Rates on Hold

The Reserve Bank's decision yesterday to keep rates on hold for the second month in a row pushed the Australian dollar higher but capped share price gains as traders pared back the likelihood of further interest rate cuts this year.

The RBA board kept the official cash rate at 3 per cent as official figures showed retailers had their best month since June last year as consumers splurged at cafes, restaurants, on pharmaceuticals and specialised food.

"The low interest environment, coupled with rising share markets and the recent improvement in consumer confidence, is finally starting to entice consumers to spend a little more freely," Commsec economist Savanth Sebastian said.

He said the RBA would be "deeply encouraged" by the figures.

The dollar briefly jumped above $US1.025 while the sharemarket rose strongly in morning trading before falling back slightly after 2.30pm when the RBA issued its monthly outlook for interest rates.

The S&P/ASX 200 index still recouped most of Monday's losses by gaining 64.9 points to 5075.4, with retailers surging after retail sales grew almost 1 per cent between December and January, more than twice what was expected, but spending at department stores and liquor outlets fell.

"While some retailers have been under pressure from the high dollar and changing spending patterns, lower interest rates will continue providing support for the retail industry," Wayne Swan said.

The RBA barely changed the wording of its monthly monetary update, maintaining its modest easing bias which saw financial markets factor in a 34 per cent chance of a rate cut next month.

"In one of the few instances where the statement was updated, the assessment of the world economy was slightly more positive, and the bank is more confident that the housing market is responding to lower interest rates," said Barclays economist Kieran Davies.

HSBC chief economist Paul Bloxham said the accompanying statement was helping to keep the dollar, which hit a four-month low overnight, relatively weak.

"Tactically, it pays the RBA to be dovish, irrespective of whether it eases further, particularly given the global currency wars," he said.

"As one of the key objectives for the RBA is to orchestrate a rebalancing of Australia's growth, by supporting growth in the non-mining sectors, they are looking for the dollar to come down a bit."

Commsec chief economist Craig James said: "The longer the period of interest rate stability, the greater the likelihood that the Reserve Bank will look to lift rates from super-low levels in future." He suggested a "normal" level for the cash rate of about 4 per cent.

Source: http://www.theaustralian.com.au/business/markets/interest-rate-call-boosts-dollar/story-e6frg916-1226591081748
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Interest Rate Call Boosts Dollar
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