RBA Interest Rate Decision, May 2015 – A very close call

May 04, 9:08 am
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The RBA meets on Tuesday, the 5th of May 2015 for its policy setting meeting. In all likelihood, this policy meeting could turn out to be a very close call once again. The consensus has been inclined towards a rate cut at this meeting, a sentiment that has been echoed since the February 2015 rate cut. The subsequent policy meetings turned out with the RBA leaving interest rates unchanged but did not rule out rate cuts at its future policy meetings.

RBA Policy Decision – Reasons for a rate cut

The market consensus for a rate cut is based on the following:

  • Exchange Rate: Australian Dollar exchange rate has shot up well above the RBA’s level of $0.75. At the time of writing, the AUDUSD currency pair was trading at $0.7829. One of the reasons for the rate cut is being attributed to the high exchange rage
  • Falling commodity prices: Iron Ore prices have continued to fall over the past quarters and the RBA has repeatedly expressed concern calling for a more diversified approach from the country’s economy shifting from being overly reliant on commodity exports to other sectors. This however, is something which takes time.
  • Rumors: Various reports cite unconfirmed leaks that the RBA is ready to cut interest rates at the May policy meeting
  • Economic indicators: The annual GDP growth rate has declined from 2.7% to 2.5% at the most recent quarter (Q1, 2015). Quarterly inflation was also slowing down, with the most recent readings showing a drop to 1.3% from 1.7% previously, while month-on-month, inflation has remained stable at 0.2%
  • Crude Oil: Crude oil prices have managed to stabilize for the most part, which should in effect help lift inflation in the coming months

RBA Policy Decision – Reasons for leaving rates unchanged

  • The RBA does not have a mandate to use interest rates to influence exchange rates. Furthermore, if exchange rate was indeed the RBA’s target, there is no guarantee that cutting rates will see the Aussie Dollar depreciate in value. Furthermore, a 25bps rate cut will mean not much of room left for the RBA to steer monetary policy should the economy take a turn for the worse
  • Housing Markets: An environment of low interest rates has fueled demand for property, both commercial and residential. Unfortunately, demand in the real estate has come from foreign investments rather than domestic real consumers. The RBA has cited this risk many times. Importantly, a little piece of law that was recently introduced by the Australian Government seeks to put tougher criterion in place for foreign investment in real estate. This law, being passed only recently no doubt will ease some of the demand. The RBA would most likely prefer to wait for another month or two before it pulls the trigger and when it does, the central bank would most likely want to be sure that further rate cuts don’t spark a bubble in the property markets.
  • Economic Indicators: While inflation has slowed down, it is definitely not worse. GDP has been weak but not worse. Unemployment rate has been volatile but trending within the 6% mark +/- a few points. Based on the above, the RBA would prefer to put off rate cuts for now and wait for another quarter which will offer a better view of the economy
  • Exchange Rate: The RBA has done a fairly decent job in talking down the Australian Dollar and it could very well use any opportunity in the future to keep the pressure on the Aussie.

RBA May Policy Decision

While we again reiterate that it will be a close call, there are no strong points in the case of a rate cut. Of course, going by past history (such as the Bank of Canada’s surprise rate cut earlier this year, cited as an ‘insurance’) the RBA could also very well take a proactive approach and cut interest rates in May and this is a risk that is worth considering. Even if the RBA keeps rates on hold, it could paint a very dovish outlook on the economy and use its policy statement as a means of talking down the currency.

The recent rally in the Australian Dollar was largely due to the sell off in the US Dollar. The April NFP job numbers are due later this week with expectations of a bounce back in the US labor markets.  A better than expected print is most likely going to put the June hike back on the table (although it is highly unlikely).

Nonetheless, the May policy decision from the RBA could perhaps be called one of the most uncertain central bank policy decision so far.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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