Australian Dollar: Reactions to Latest R.B.A Developments

Will they or won’t they? We ask whether the Reserve Bank of Australia will cut interest rates that could potentially undermine the Australian dollar in 2016.

The Reserve Bank of Australia (R.B.A( left their cash rate unchanged at 2% at its board meeting on the 2nd of February.

The post-meeting statement was slightly more dovish than markets expected though with Australian dollar exchange rates moving lower accordingly.

The changes to the statement highlight the diverging developments since the Bank last met.

• The comments on the international economy were softer, with the Bank noting “financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings”.
• The language around the domestic economy, with the statement noting solid business conditions, the pick-up in employment growth, and the decline in the unemployment rate.
• There did seem to be some scepticism about the sustainability of the labour market strength, however, with the comment that “new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing”.

What Leading Researchers Think

Felicity Emmett, ANZ Research:

"Overall, the statement suggests to us that the Bank sees a number of emerging risks on the horizon, and it remains ready to cut rates if necessary.

"We continue to believe that softer demand conditions later in the year will prompt the Bank to provide some further monetary stimulus. The Bank is clearly cognisant of the emerging risks and ready to act if need be. We expect that later in the year, ongoing low inflation and a softening conditions, especially in the labour intensive housing sector, are likely to push the RBA over the line."

Hans Kunnen, Chief Economist, St.George Bank:

"The RBA is permanently engaged in a balancing act, providing support or restraint when needed.

"As we approach 25 years of continuous economic growth, we expect the RBA will assist in achieving that goal by providing both stability and support via its current accommodative cash rate of 2.00% throughout 2016."

Tapas Strickland, Economist at N.A.B says he reads today’s Board Statement positively though highlighting the potential risks to the outlook, “with the RBA uncertain whether international developments will weigh on the prospects for the domestic economy into 2016.”

“The domestic data to date has continued to surprise with the RBA continuing to note a moderate improvement in the domestic economy with business conditions above average and strong employment figures driving the unemployment rate down to 5.8% - clearly below the RBA’s November forecasts when the Bank expected the unemployment rate to be between 6-6.25%.”

Boris Schlossberg, BK Asset Management:

"It may be too early to celebrate Australia's ability to rebalance itself as the worst of the economic news for the mining industry is yet to come. The drastic falloff in demand from China has slashed capital budgets going forward and the full extent of the layoffs in mining are still unknown.

"Up to now Australian employment picture has been remarkably robust given the adjustments in the region, but as RBA itself noted any future weakness in labor is likely to provide scope for further rate cuts and that along with the weakening commodity prices in the overnight trade was likely the contributing factor to Aussie's reversal in overnight trade."