Westpac: Rates will remain on hold for the rest of the year

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Following the announcement of the Reserve Bank of Australia to let the cash rate remain unchanged at two percent, Westpac's chief economist Bill Evans issued a commentary regarding the different factors that possibly affected the RBA's decision not to increase the rates.

The Australian dollar has risen from 71.50c US to 76.50, with the Australian trade weighted index also rising from 61.30 to 64.20. The Governor of the RBA partly attributed this currency rise to monetary policy overseas, although he also noted that an appreciating exchange rate could complicate the economic adjustment since it could trigger a policy response.

"Currency markets at least were expecting stronger negative sentiment towards the recent rise in the AUD," Evans wrote.

As for the upcoming inflation report, Westpac expects that the underlying inflation will print at 0.6 per cent qtr. Any surprise on inflation may affect policy as evidenced by the Governor's statement to examine new information "to assess the outlook for inflation."

"With global financial markets settling down since the March sentiment, the inflation report has replaced recent financial turbulence as the important new source of information along with labour market conditions," Evans wrote.

The December quarter GDP report also encouraged the Governor to continue to remain optimistic about the economy, as it showed a growth of three per cent in 2015.

"We are retaining our call that rates will remain on hold for the remainder of the year," Evans concluded. "We do not envisage a further significant surge in the AUD and remain comfortable with a steady policy outlook."

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