From HSBC’s chief economist, Paul Bloxham, comes the following analysis of today’s interest rate decision by the Reserve Bank of Australia:
The RBA kept its cash rate on hold today at 2.75%, as expected. The main story has been that the AUD has continued to fall and is doing much of the RBA’s work for them in the face of weaker global indicators. Australia’s great shock absorber is working again. As they noted, further AUD depreciation ‘would help to foster a rebalancing of growth in the economy’. Looking ahead, the rates and AUD outlook are intertwined. If the AUD falls further it may obviate the need for more rate cuts. If it stays around its current level (or lifts), we see the RBA as likely to cut rates further, perhaps as soon as next month, after Q2 CPI.
Facts
– The RBA held the cash rate steady today at 2.75% (26 of 28 economists in the Bloomberg survey expected a hold decision, including HSBC, and this was 85% priced just prior to the announcement).
– The statement was similar to last month’s, though it placed more emphasis on the role the AUD is playing in loosening financial conditions, much as we expected.
Implications
Australia’s great shock absorber is working again. The Australian dollar has fallen by around 10% since early April and is loosening financial conditions which will further support growth. Given the AUD is doing the work for them, the RBA felt they could hold rates steady this month.
There is a sense in the statement, however, that the RBA would still like the AUD to depreciate further. They note that despite the depreciation to date, the AUD remains at a ‘high level’ and a further depreciation would help to ‘foster a rebalancing of growth in the economy’.
Looking forward, the rates and AUD outlook are intertwined. If the AUD falls further it may obviate the need for more rate cuts. If the AUD stays around its current level (or lifts), we see the RBA as likely to cut rates further, perhaps as soon as the next meeting, as it follows the all-important Q2 CPI result.
Bottom line
The RBA remained on hold as expected.
They noted that the AUD had done a lot of the work for them but hinted that further depreciation would help to rebalance growth in the economy.
We expect they may choose to deliver another rate cut in coming months unless the AUD depreciates further.
