Australian interest rate decision a close call

The Reserve Bank of Australia’s (RBA) decision to leave its official interest rate on hold at 4.5% was a line ball call, going on minutes from its board meeting.

The Australian dollar fell sharply when the RBA revealed on October 5 that it had opted for no change in the rate, as opposed to market expectations that it would increase it by 25 basis points.

But it was just a temporary setback for the Australian dollar, which briefly hit parity with the U.S. dollar over the weekend.

The rapid appreciation of the Aussie dollar, which acted as a market-led tightening of conditions, also played a part in the decision, according to the minutes.

“The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin,” the minutes said.

“Moreover, it was still possible that downside risks to global growth could materialise,” they said. “Members felt that these arguments were finely balanced.”

The September quarter CPI is due for release on October 27. The CPI result is expected to be a key determinant in the RBA’s next rate decision, which is due on November 2.

TD securities fixed Income and foreign exchange strategist, Roland Randall, said the minutes showed that rates are going to rise soon, “it’s just the month-to-month timing which is open to debate”.

“The board is clearly anxious to hike again, so if the ‘tone’ of global data is better through the next couple of weeks this will be enough in itself to trigger a hike in November,” he said.

However if global uncertainty continues at the current level, it would make sense to wait before making a move, he said.

He said November tightening is “a 50/50 call”.