Rate Cuts are Old School, RBA Hints

This week, RBA Governor Glenn Stevens announced the bank’s decision to once again keep its target interest rate steady at 3.0%, its lowest level in almost 50 years. After peaking at 7.25% in March last year, borrowing costs have been reduced significantly to combat the effects of the global recession. According to Stevens, the recent stability in consumer spending and the export industry were the primary reasons for the decision.

There are even hints that the bank would not wait for the economy to fully recover before raising rates. It appears that whether rates should be increased or not isn’t the question anymore. The main concern of the bank right now is finding the right timing for a rate hike. Economists foresee the RBA raising borrowing costs by 25 basis points as early as December, with an additional hike of 50 basis points in March 2010. Now, it looks like the prospect of reducing borrowing costs in case of another economic downturn, as echoed in the RBA’s last statement, is simply a thing of the past…

Even though the RBA statement was upbeat, traders weren’t ready to throw another “shrimp on the barbie” just yet. The “Aussie” rose by a mere 40 pips as market players became delighted at the possibility of a rate hike come the December holidays. Soon after, it resumed its downslide, which was caused by the recently reported 1.4% decline in retail sales. Traders brought the “Aussie” down to a low of 0.8388 as they remain cautious ahead of the RBA’s monetary policy statement on Friday. Price action of the AUD/JPY also reflected doubts regarding the outlook for the Australian economy as it sank from 80.43 to 79.35 a few hours after the rate decision.

The recent trade balance report from Australia could turn some of these frowns upside down. Australia’s trade deficit, which was expected to widen to A$800 million, was reported to have narrowed to A$441 million from high of A$737 million in May. The unexpected improvement can be attributed to China’s expanding economy whose GDP surged by 7.9% in the second quarter of 2009. This was further supported by a 10.7% month-over-month gain in industrial production, which has benefitted Australia’s gold, iron ore, and energy exports. China, the second biggest export market of Australia, is an important factor in Australia’s growth and has entered the stage of robust industrialization. As long as Australians keep the Chinese happy by supplying them with much needed resources, all would be well for both nations.

With the Australian economy showing some resiliency, it seems that some economists may be on the right track with their speculations that Australia would be one of the first nations to hike its target rate later this year. With the way things are going, it seems like the land down under is climbing steadily to the top of the world!

  • krewsey

    Cheers for the overview. Very interesting

  • krewsey

    Cheers for the overview. Very interesting