Expectations that the dollar has further to fall has helped convince the Reserve Bank of Australia to keep interest rates on hold despite concerns about sluggish growth in the economy.
In a widely anticipated decision, the RBA Board has held the cash rate steady at 2.75 per cent for a second consecutive month as it assesses the effect of a 10 per cent slide in the currency against the greenback in the past three months on prospects for growth.
In a bearish assessment on the outlook for the currency following the Board meeting, RBA Governor Glenn Stevens said it was “possible” the dollar had further to fall.
The weaker dollar, which was trading at around US92 cents just before the Board’s decision was announced, is expected to encourage a lift in activity in manufacturing, higher education, tourism and other trade-exposed sectors of the economy.
Mr Stevens said that if it continued to slide, it would “help foster a rebalancing of growth in the economy”.
But the central bank has not ruled out further rate cuts, indicating that the moderate outlook for inflation – which it expects to hold steady at around 2.5 per cent “over the next one to two years” – leaves room to move the cash rate lower.
“The Board judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand,” Mr Stevens said.
The RBA Board stood by its assessment of a month ago that although the global economy was currently growing at a subdued pace, it was likely to strengthen next year.
Markets have been rattled in the past month by signs of a sustained recovery in the US economy, which has fuelled speculation that the US Federal Reserve may begin winding down its extraordinary stimulus efforts by late this year.
Though the latest US growth figures were revised down last week, there is mounting confidence that a sustained recovery in the world’s largest economy is underway.
But sentiment has been hurt by evidence of a developing credit squeeze in the Chinese economy as authorities act to curb lending and encourage greater demand-driven rather than investment-driven growth.
Closer to home, the RBA is conscious of the difficult transition underway in the Australian economy as the support for growth from massive mining investment tapers off, while activity in other sectors is yet to pick up, leaving the country vulnerable to downturn.