Australia's central bank Tuesday held interest rates steady at an all-time low of 1.75 percent, with uncertainty about the Brexit impact and inflation outlook making it "prudent" to stay on hold. The Reserve Bank of Australia cut the official cash rate from 2.0 percent in May but has not moved since, with governor Glenn Stevens keen to see how the economy reacts to recent events.
"Financial markets have been volatile recently as investors have re-priced assets after the UK referendum. But most markets have continued to function effectively," he said in a statement. "Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern." Most economists expected the central bank to hold fire given Britain's decision to exit the European Union and weekend elections in Australia where a winner has yet to be announced, although Stevens made no mention of domestic politics.
Three days after polls closed the result is still too close to call, with the ruling Liberal/National coalition and the opposition Labor each short of the 76 seats needed to govern, raising the prospect of a hung parliament. On Monday, the major ratings agencies warned political paralysis through a hung parliament, where whoever is in power has to get legislation past often obstructionist minor lawmakers, threatened the nation's coveted AAA credit rating.
Stevens added that given weak domestic inflation and the economy's ongoing transition away from mining, it was wise to maintain the status quo. "Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting," he said. "Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate."
The Australian dollar rose on the news, but quickly pared those gains to be trading at 75.10 US cents from 75.21 US cents before the decision. Capital Economics chief Australia economist Paul Dales said he expected a rate cut in August, depending on second quarter inflation data due for release later this month. "We think that the weak outlook for inflation will prompt the RBA to cut rates to 1.5 percent in August and eventually to 1.0 percent next year," he said.
Australia is enjoying growth which outstrips some of the world's most advanced economies, and last month defied market forecasts by reporting an annual year-on-year reading of 3.1 percent in the first quarter on the back of strong exports. The RBA said that lower interest rates had supported domestic demand and were helping trade - factors which were assisting the economy to make needed adjustments as it exits a mining investment boom.