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Rates on hold, next move may be up

Economics correspondent Peter Martin says the next interest rate move may be upwards, after the Reserve Bank leaves rates on hold for another month.

PT1M45S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-341sk 620 349

The Reserve Bank of Australia has kept the cash rate on hold at a record low of 2.5 per cent, but indicated it wants the Australian dollar to keep falling.

The Australian dollar fell shortly after the announcement, dropping from US89.69c to US89.20c by 2.35pm AEDT.

"Our position has long been, and remains, that foreign exchange intervention can - judiciously used in the right circumstances - be effective and useful.": RBA Governor Glenn Stevens.

RBA Governor Glenn Stevens. Photo: Louise Kennerley

But RBA governor Glenn Stevens resumed the central bank's 'jawboning' for a weaker Australian dollar, noting that while the "decline in the exchange rate seen to date will assist in achieving balanced growth in the economy", the dollar "remains high by historical standards".

The renewed call for a lower exchange rate was likely to be a reflection of the central bank's concern over the local currency's rally following the February meeting, Macquarie economist Gabby Hajj said.

At the time, the dollar jumped from US87.5¢ to trade above US89¢ after the RBA dropped its comments that the currency was "uncomfortably high".

"They are happy where the currency is, but they still want it to fall further - I think that's the key [takeaway] from this," Mr Hajj said.

"It looks like they are still happy with the overall story in the economy. The data was mixed over the past month, although for them, it was enough for them to maintain their optimistic outlook."

Last year, Mr Stevens said in an interview with The Australian Financial Review that he wanted the currency closer to US85¢.

Mr Stevens' "modest swipe at the Australian dollar ... was not expected", Westpac currency strategists Robert Rennie and Sean Callow said in a note.

"The initial response to sell the Australian dollar modestly seems reasonable, if for no other reason than it is now more likely that Governor Stevens will elaborate on his long-term Australian dollar outlook at Friday's testimony to the parliamentary economics committee."

At the same time, the RBA also acknowledged the weaker-than-expected business spending intentions in the coming financial year, which were showed in Bureau of Statistics data released last week.

"Signs of improvement in investment intentions in other sectors are only tentative," the central bank said, adding that "public spending is scheduled to be subdued".

The central bank, which in February flagged a "period of stability" in interest rates, repeated the same phrase in today's statement.

"In the board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," Mr Stevens said in a statement after the board meeting.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

The RBA has cut the official cash rate by 2.25 percentage points since November 2011 in an effort to stimulate the non-mining sectors of the economy as resources investment peaks.

Its last rate cut was in August 2013.

Economists had widely expected the central bank to stay its hand this month as it watches the impact of lower rates on the economy.

The RBA moved to a neutral monetary policy stance last month, in part driven by a surprise jump in fourth-quarter inflation figures.

The monthly decision by the Reserve Bank, the second so far this year, followed the release of a raft of economic figures yesterday and today, which together painted a mixed picture of the economy.

Building approvals jumped to their highest monthly growth in more than a decade, with strong rises for both detached houses and apartments, as the interest-rate sensitive housing sector continued to take advantage of the low rates environment, data released by the Bureau of Statistics today showed.

But while the housing market has continued to show signs of growth and job advertisements surged during the same period, the manufacturing sector slowed again and inflation rose towards the top end of the RBA's target band, a series of private surveys published yesterday revealed.

At the same time, fourth-quarter business indicators pointed to a weakening in inventories, but company profits and employee wages rose, further data from the statistics bureau found.

The longest period in recent times for which the RBA kept the official cash rate on hold was between November 2010 and October 2011, when it was held at 4.75 per cent.