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The Reserve Bank of Australia is tipped to keep interest rates static for longer than previously expected by analysts at Australian lender Macquarie, which will have implications for the Aussie Dollar's outlook.

"The economy is improving but the unemployment rate remains too high, and wages and price inflation too low. As former Governor Stevens often noted, monetary policy should be set on the path of least regret," says analyst Justin Fabo with Macquarie in Sydney.

The call comes a day after we reported Australian business conditions are riding high amidst signs the economy remains on a strong footing. We did however caution that the Aussie Dollar would see gains ultimately capped until wages are seen rising and therefore the strong conditions elsewhere in the economy will not necessarily translate into higher interest rates at the Reserve Bank of Australia.

The Australian Dollar has found itself coming under pressure against other currencies over recent months as central banks are in the process of raising interest rates. This diminishes Australia's once superior interest rate advantage. It was this advantage that ensured the Aussie Dollar outperformed rivals for many years and if the RBA starts raising rates once more it could help restore that superiority.

However, Macquarie reckon the RBA will "err on the side of supporting growth for longer to gain more confidence that inflation will once again spend more time in the 2-3% target than not."

Another factor to consider is that risks to the housing market have diminished with "the source of much angst for the Bank – fast growth in housing prices in Sydney and Melbourne" seen easing.

Since August 2017 analysts had 25bp hikes pencilled in for August and November this year.

Markets are pricing a non-negligible 45% chance of a rate hike by end 2018, "which looks about right in our view," says Fabo.

GDP growth is meanwhile revised up modestly for 2019 from 23⁄4% to a little more than 3% with Macquarie saying they remain constructive on the Australian economic outlook.

Global growth is a tailwind, domestic labour market and reported business conditions are strong, the investment outlook is very positive and actual and expected inflation remain low," says Fabo.

Forecast growth for 2018 remains broadly unchanged at 2.9%.

With a less proactive central bank, forecasts for the Australian Dollar are pared back.

Macquarie now expect the Australian Dollar to average around US$0.78 this year rather than US$0.80 with the key uncertainty for the currency being the commodity price outlook.

The forecast for AUD/USD in 2019-2020 is 0.75.

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