RBA Keeps Rates On Hold, Provides "Scope For Further Easing"

Overnight, the Reserve Bank of Australia (RBA) kept rates on hold for the second consecutive month after cutting its benchmark interest rate in May. The Bank has been easing policy in the face of slowing exports to China, which have weighed on growth and seen inflation slow.

Rate Decision

The RBA, led by Governor Glenn Stevens, announced that rates were kept on hold at 2.75 percent for July as "recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year." Australia has benefited from a boom in China over the past decade as the resource-rich nation was able to export its vast raw materials deposits to the resource-deficient emerging market.

"Commodity prices have declined further but, overall, remain at high levels by historical standards," continued Stevens. "Inflation has moderated over recent months in a number of countries."

The RBA also noted the recent market response to the Fed's statement last month which markets took very negatively. "A reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels. Volatility in financial markets has increased and there has been some widening of credit spreads."

"Scope For Further Easing"

The RBA has tied future rate cuts to inflation and sees potential downside to inflation. Thus, there could be future rate cuts if inflation does remain low. "The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand."

If the RBA were to cut rates further, it would surely lead to further downside in the Aussie dollar. The currency has slid from well over 1.08 against the U.S. dollar to recent lows near 0.91. However, if inflation slows further, the RBA would be expected to cut rates and the Aussie could fall further to new lows.

Shares Jump

Australian shares rose sharply overnight, taking a leg higher on the RBA decision as the statement left open the likelihood of further monetary easing. The S&P/ASX Index gained a strong 2.63 percent to 4,834.00. However, the index is still down about 400 points, or nearly 8 percent, since its May high.

The Australian dollar fell sharply on the statement, dropping quickly from above 0.92 to near 0.915 before extending losses to 0.9149, a decline of 0.86 percent. The Australian dollar also lost 0.74 percent against the yen and fell 0.62 percent against the euro.