The RBA signals its discomfort with the rising Australian dollar

Other than the comments on currency, the Australian central bank kept its verbiage largely unchanged from its prior statement.

In his monetary statement accompanying the RBA's decision to keep the cash rate on hold at 1.5 per cent yesterday, Mr Lowe devoted a paragraph to the recent appreciation of the Australian dollar.

Higher commodity prices, weakness in the US dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar.

A strengthening exchange rate, Dr Lowe warned, "would be expected to result in a slower pick-up in economic activity and inflation than now forecast".

But he warned that recent rise in the Australian dollar "is expected to contribute to subdued price pressures in the economy" as well as "weighing on the outlook for output and employment". "The RBA's monthly FX reserve levels will become a little more interesting for the market now".

"With the Australian dollar having rallied by 4¢ against the U.S. dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried".

As had been widely predicted by economists the central bank voted to again leave interest rates on hold in their August meeting.

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

Mr Farnham said the RBA was unlikely to raise rates this year, and the possibility of a further cut could not be dismissed.

Inflation is expected to pick up gradually as the economy strengthens. The economy is nearly out of the reversal of mining investment that had been weakening growth of late - another bonus.

The bank noted that forward-looking indicators point to continued growth in employment over the period ahead.

"Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending", he said. Higher prices for electricity and tobacco are expected to boost CPI inflation. Sydney and Melbourne house prices have added more than 10 percent over the past year, but low interest rates made an unpredictable frenzy among real-estate investors seeking to trade in tax breaks. The weakness remains household debt - at a record 190% of income and among the world's highest - which is still outpacing income growth.

Nicholas Gruen, CEO of Lateral Economics, was far more succinct when explaining why he believed rates would remain steady.

  • Anthony Vega