And another one bites the dust! The Reserve Bank of Australia decided to join the rest of the dovish central banks, as it announced an interest rate cut from 2.50% to 2.25% in today’s monetary policy decision. Here’s what you need to know from the event:
1. Downbeat economic assessment
It’s no surprise that RBA Governor Stevens and his men gave a very downbeat assessment of the Australian economy’s performance lately, as the below-trend growth and bleak domestic demand were enough reasons for them to justify a rate cut. Apart from the negative impact of the commodity price declines, they also pointed out that unemployment has been climbing recently.
In particular, the RBA noted that falling oil prices have dragged trade revenues lower, which translated to smaller profits for exporters and weak income growth for their employees. In effect, this spurred weaker consumer spending even as price levels have been falling.
2. Further weakness expected
What’s worse is that RBA policymakers are foreseeing a deeper economic slowdown, as output growth could stay subdued. Bear in mind that Australia is an export-driven economy, with raw material commodities comprising a huge chunk of the industry’s revenues. Further declines in the prices of its main exports such as copper and iron ore would mean a shrinking contribution to growth from its trade sector.
The central bank also expects a prolonged downturn in hiring, as the official statement indicated that unemployment could peak a little higher than previously estimated. It also noted that the economy could continue to operate with a degree of spare capacity for some time.
3. More AUD jawboning
Count on RBA Governor Stevens to take this opportunity to keep jawboning the Aussie! As usual, the central bank head reiterated that the currency remains overvalued in terms of fundamentals, even though it has depreciated significantly against the U.S. dollar. He emphasized that a lower exchange rate level is needed to achieve a more balanced growth in the economy.
Even though several forex market watchers and financial institutions have already anticipated a rate cut from the RBA this week, the Aussie still chalked up considerable losses against its counterparts. AUD/USD plummeted by more than a hundred pips from .7800 to below .7700 right after the announcement while AUD/JPY fell by more than 2% during the Asian trading session. Do you think the Aussie is in for more losses throughout the week?