Reserve Bank holds rates but wants to see dollar go lower

The Reserve Bank has left the door open to further interest rate cuts, saying it has ”scope for further easing, should that be required”.

The bank board decided to leave its cash rate on hold at the half-century low of 2.75 per cent on Tuesday in part because it saw some signs its earlier cuts were boosting economic activity and wanted to wait and see if there were more.

It was also pleased that, since it last met, the Australian dollar had slipped below US100¢, providing the first boost from a lower exchange rate in more than a year.

But in a statement released after the board meeting, governor Glenn Stevens made it clear the dollar was nowhere near low enough.

”It remains high considering the decline in export prices that has taken place over the past year and a half,” he said. Souring the bank’s view of the decline in the dollar was the knowledge that in the month in which the dollar fell, commodity prices slipped 3 per cent, depriving exporters of much of the benefit from the lower exchange rate.

The bank will watch movements in the dollar and commodity prices closely in the next few weeks in order to form an opinion as to whether the recent slide in the dollar is a small one-off adjustment or part of a move back to the more normal exchange rate it thinks Australia needs.

The bank’s focus on the

exchange rate means that each monthly board meeting is ”live”, with the board prepared to cut rates if needed without waiting for the quarterly inflation result.

Mr Stevens said inflation was under control and ”expected to remain so over the next one to two years”.

Economic growth was ”a bit below trend”, providing another reason to cut rates again ”should that be required to support demand”.

Treasurer Wayne Swan said the bank had ”the flexibility to cut” should it need to.

The economy was in a transition that would ”not be seamless, particularly with the dollar still at high levels”.

Meanwhile, Australia’s biggest wholesale mortgage broker AFG reported that it had processed a record number of mortgages in May, $3.6 billion worth, up 13 per cent from the record $3.2 billion processed in April.

AFG makes up 10 per cent of the market.

Mark Hewitt, AFG’s general manager of operations, said there had been a marked lift in borrowing since February.

”Borrowers of all types were encouraged by the further rate reduction in early May and the expectation that we are in a low rate environment for some time to come,” he said.

”Reassuringly, the growth looks sustainable. We are not seeing the normal characteristics of a boom. The average new loan size is the same as it was over a year ago.”

The increase applies to all types of mortgages: loans for purchasing houses, loans for first home buyers, loans for investors and refinancing.

Futures market prices late on Tuesday implied a 100 per cent probability of a further interest rate cut by October. The chance of a cut at the bank’s July meeting was 32 per cent.

Wednesday’s national accounts are regarded as unlikely to alter the Reserve Bank’s thinking.

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