Australia: Going with the Flow - ING
James Knightley, Senior Economist at ING, notes that the Reserve Bank of
Australia (RBA) left policy unchanged, but suggested they continue to have
room to act should inflation soften, citing currency strength as a key
issue.
Key Quotes
“The Reserve Bank of
Australia last cut its policy rate in May 2015 and yesterday again, cash
rate was kept at 2%. On the positive side the accompanying statement
highlighted the growing global economy, the recent modest strengthening
in commodity prices and the improvement in sentiment in financial
markets.
At the same time the Australian economy “is continuing
to rebalance”, bank lending is picking up and the labour market is in
reasonable shape. Indeed, the economy is expected to strengthen further
this year with the consensus forecast amongst economists being for GDP
to expand 2.6% this year and 2.9% in 2017 (we are even more optimistic,
looking for a 3%+ reading).
However, the RBA also suggested that
there is little inflation in the system with labour costs remaining
“quite subdued” and with the global inflation backdrop looking benign
then domestic CPI readings are likely to “remain low over the next year
or two”. This means that there is no pressure for the central bank to
tighten monetary policy. If anything, the risks are that the RBA chooses
to offer more stimulus in the near-term.
The catalyst for
action could come from further Australian dollar strength (AUD has
appreciate 7% on a trade weighted basis since January lows). Indeed, the
RBA suggest that “an appreciating exchange rate could complicate the
adjustment under way in the economy”. If this continues and leads to
growth expectations starting to moderate then we could see the RBA
acting with another rate cut. This is not our base case though, whereas
we continue to look for a 25bp cut in Canada and 50bp of cuts in New
Zealand.
While some of the recent AUD rise was justified by
decreasing China risk, more dovish Fed and the rebound in commodity
prices, the RBA seems uncomfortable with further AUD gains. The bulk of
the market reaction to today’s RBA decision is now behind us and with
stock market under pressure overnight, AUD/USD is unlikely to move above
the 0.7640 level today.”
(Market News Provided by FXstreet)
