Find below the latest short note from HSBC’s chief economist, Paul Bloxham, arguing that the 11% fall in the Australian Dollar since mid-April will stay the RBA’s hand in cutting interest rates next week (although it will likely cut in August), whilst also helping the economy re-balance as the mining boom unwinds:
Importantly though, the AUD is starting act as a shock absorber for the Australian economy. The AUD is now -11% lower, on a trade-weighted basis, than it was in mid-April, with around half of this fall since the last RBA meeting.
From the RBA’s perspective the AUD’s fall will be the key development affecting its policy view. General rules of thumb suggest that a -10% depreciation could add around 0.3-0.4ppts to the CPI each year, which all else equal, would lift the RBA’s inflation forecasts to around the middle of the target band by end-2013. The depreciation should also support Australia’s growth rebalancing act.
In terms of the outlook for rates, much depends on where the AUD settles. The recent fall in the AUD gives the RBA time to hold steady this month, but there is still some room for it to cut further if needed. If the AUD settles around its current level (or above), we expect the RBA may still cut rates further. A further drop towards USD0.85, however, may mean further rate cuts are not needed for the moment, all else remaining equal. For now, we expect the RBA to be on hold.
