RBA stays put on rates but says downside risks have increased

Rate-setters Down Under stayed put on interest rates on Tuesday, as expected, but markets appeared to interpret the policy statement from Reserve Bank of Australia' Governor, Philip Lowe, dovishly.

"The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time," Lowe said.

In previous statements, as analysts at TD Securities pointed out, Lowe had alluded to the need to keep the stance of monetary policy unchanged.

Against that backdrop, as of 1118 BST the Aussie was down by 0.9% against the US dollar to 0.70768.

Nevertheless, the RBA did state clearly that global growth had slowed and that downside risks had increased.

"The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual," the central bank said.

Following the policy announcement, the OIS curve shifted to price-in a 100% probability of a rate cut by August, versus the 90% odds seen just before the meeting.

But analysts at TD Securities disagreed, saying that a low and stable exchange rate, together with "carefully targeted tax cuts and government spending is more likely to boost the economy than expecting another rate cut or two to have any impact."

"We maintain our hawkish tilt that the cash rate 'should' be higher in 2020, a case that may be strengthened if the fiscal policy boost is substantial and broad-based."

On Tuesday, the monetary authority projected that underlying inflation would rise by 2% in 2019, accelerating to a 2.25% pace over the course of 2020.

That was in comparison to a policy target for consumer price gains of 2.0-3.0%, on average, over the medium-term.