3 Takeaways from the RBA’s August Rate Cut

The Reserve Bank of Australia (RBA) was first to draw blood from forex traders this week, as it published its monetary policy decision for the month of August. What did the central bank have to say? More importantly, how have investors reacted so far?

Let’s break down the takeaways into three points:

1. Interest rates are down to new record lows

That’s right; the RBA has done it again! Earlier today the central bank announced that it’s cutting its interest rates from 1.75% to 1.50%. Not only does the decision mark the second rate cut this year (the first one was in May), but it also puts the RBA’s rates to new record lows. Yowza!

2. Global and domestic concerns

In the last part of its statement, the RBA said that easing policy this month would help sustain growth and help return inflation to its target rates over time. So was the decision all about inflation after all? Here’s the gist of its global and domestic concerns:

On the global markets

The RBA cited improvements in advanced economies, but noted that underlying growth in emerging markets (such as China) appears to be moderating. Not only that, but it also believes that the global economy is growing at a “lower than average pace.”

The central bank also mentioned the recent upticks in commodity prices, but noted that they’re still recovering from sharp declines from the past few years. In fact, the RBA is worried that “Australia’s terms of trade remain much lower than they had been in recent years.”

On the Australian economy

The RBA is pretty upbeat over the local economy, saying that growth in Australia continues at a moderate pace despite a “very large decline in business investment.” It also shrugged off the recent red marks on the employment numbers, saying that the indicators are “somewhat mixed” but are still consistent with a modest expansion in the near term.

The most interesting bits of the release are found in the remarks over inflation and housing. The central bank warned that consumer prices are expected to remain low for some time, as subdued labor cost growth and low inflation around the world make it hard for the domestic economy to foster high inflation.

Meanwhile, the RBA is still discouraging housing speculators by remarking on the “strengthened lending standards in the housing market” and saying that “dwelling prices have been rising moderately over the course of this year.”

Interestingly, the RBA now believes that the “more cautious attitude towards lending” and slower growth in lending for housing purposes have decreased the risks of the RBA’s low rates negatively affecting Australia’s housing markets. Is this why Stevens and his gang were confident in cutting rates this month?

Speaking of rates, the RBA stated that low interest rates, together with a lower exchange rate, have been assisting the trading sector since 2013 and are helping the economy make “necessary adjustments.” Of course, they were also quick to remind us that a high Aussie could complicate these adjustments.

3. Aussie’s reaction

The RBA’s rate cut was widely expected after Australia published its weak Q2 2016 inflation numbers in July. After all, the last time the RBA had cut its rates was in May, almost immediately after the Q1 2016 inflation data had also printed disappointing numbers.

AUD's 5-Minute Forex Charts

AUD’s 5-Minute Forex Charts

The Aussie still ended up falling across the board, though it also quickly recovered most of its intraday losses. In fact, a quick look at the Aussie’s charts tells us that the event candles are currently serving as intraday bottom for the comdoll today.

For now it looks like the RBA is content to let interest rates do its work in helping fight deflation. Analysts are seeing at least one more rate cut though, most likely in November after the Q3 2016 inflation numbers are released By then Philip Lowe will be on his second meeting as the new RBA Chief.

If Australia’s indicators don’t show much improvement by November, will the new committee consider more easing measures? Or will it stick to cutting its rates until it hits rock bottom? What do you think?


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