The Reserve Bank of Australia cut its overnight benchmark lending rates by 25bps from 2.5% to 2.25%. The Aussie fell as much as 1.9% against the Greenback, as the RBA continued to talk down the Aussie’s exchange rate earlier today.
The rate cut was widely disputed with a 50 – 50 chance, as most economists had spelled out reasonably strong reasons for and against the rate cut. It was only in the fourth quarter of last year that the RBA Governor, Stevens had ruled out any interest rate hikes but refrained from commenting on rate cuts for the year ahead. With the slash in interest rates now being a done deal, economists expect that the RBA has more room to cut interest rates in the months to come, giving the Aussie a bearish outlook in the short term.
Staying the course in regards to the exchange rate, RBA Governor noted that the exchange rate remains higher than its fundamental estimates especially given the falling commodity prices and stressed the need for a lower exchange rate in order to foster sustainable growth in the economy. Most recent economic data from the country showed a slowdown in the quarterly consumer price index and also a decline in the quarterly import prices. While Australia has been lucky enough to stay away from the threat of deflation, the weaker inflation outlook and soft growth were the prime concerns that led to the RBA’s decision today.
The RBA’s decision comes hot on the heels of last month’s Bank of Canada’s rate cut while the BoE’s rate hike guidance has been pushed beyond 2016 and the ECB’s recently launched quantitative easing policy. Amongst all the developed economy’s Central Banks, the US Federal Reserve remains the sole Central bank committed to rising interest rates later this year (a view that is starting to turn more doubtful in light of the prevailing global economic conditions and the strengthening US Dollar).
Other fundamentals out of Australia included the building approvals, which managed to post better than expected readings at -3.3% vs. -4.8% expectations. The previous month’s print was also revised higher to 7.7%, but the data was largely overshadowed in light of the RBA’s decision.
The Aussie was seen trading near $0.75 at the time of writing, declining from $0.82 just a few weeks ago. The RBA Governor Glenn Stevens had late last year indicated that he would prefer to see the Australian Dollar trade near $0.64, a view that seems to be increasingly achievable given the current economic trends. The currency was weaker against most of its peers including the Kiwi Dollar, with the Aussie trading near the region of 1.063.
