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
“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)