Australian Dollar Undermined by RBA Policy Briefing that Points to August Interest Rate Cut

australian dollar exchange rate forecast

Australia's Central Bank will be reviewing data and deciding what to do based on that as global concerns potentially impact

The Aussie dollar ended lower after the Reserve Bank of Australia (RBA) rate meeting decision early on Tuesday June 5, despite spiking up briefly in the volatile minutes following its release.

Whilst the governing board did decide to keep policy unchanged, leaving base interest rates at 1,75%, they inserted a new sentence in their accompanying statement, which suggested a shift  towards an ‘easier’, more data-dependent policy stance, which could be interpreted as the first small step towards priming markets for a ‘cut’.

The new sentence read:

“Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

The slight shift towards considering an interest rate cut, was more or less in line with what most analysts had been expecting, although on the less aggressive end of the scale, as it far from explicitly advertised any intentions of cutting rates.  

The ripple effects of the UK’s vote to leave the EU and the potential for a deeper contraction in China, were two outside factors which had been expected to push the RBA further towards making an early interest reduction, however, these did not appear to be considered as significant as had been feared.

In relation to Brexit the statement said:

Financial markets have been volatile recently as investors have re-priced assets after the UK referendum. But most markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”

The prognosis on China was surprisingly benign too:

“China's growth rate has moderated further, though recent actions by Chinese policymakers are supporting the near-term outlook.”

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The reintroduction of an explicit easing bias, albeit a soft one, into the RBA’s post-meeting statement yesterday opens the door to an August rate cut reckon ANZ Research in Sydney.

While activity and employment growth remain solid, inflation is weak and the rise in uncertainty generated by the Brexit vote in the UK and the unresolved federal election result locally suggests to us that further monetary policy easing is likely.

"The behaviour of the AUD will also be important for the RBA. The Q2 CPI is crucial to the decision, but we expect that weak inflation and rising uncertainty will see the RBA cut the cash rate to 1.5% next month," say ANZ.

Barclays Capital’s David Fernandez commented that the new sentence showed a, “willingness to make adjustments to the policy stance based on new incoming information.”

He put the change down to the impact of global factors:

“We think this change to the statement could have been made in light of the potential downside risks (although still highly uncertain at this stage) to business confidence and economic activity in Australia posed by recent developments, such as the UK voting to leave the EU, the possibility of a hung parliament in Australia as suggested by early vote counts, and recent moderation in economic activity in China.”

On inflation, Fernandez commented that the statement mentioned how low wages continued to keep inflation subdued but that this was no different to what the RBA said in its previous statement and therefore showed “no deepening of concerns.”

The RBA introduced a new phrase about house prices rising in many parts of the country, however, this was offset by expectations that tougher lending standards and increased supply of apartments, especially in the east coast would moderate gains.

Whether this was meant to clarify that the rise in house prices would not hold back the RBA from cutting rates or that it was highlighting a potential obstacle to cutting rates is not easy to tell.

David Fernandez suggests the RBA was not overall concerned about house price inflation:

“The RBA added the phrase “in many parts of the country over recent months” to the sentence commenting on house price increase. However, the overall concern does not appear high with the continued expectation that supervisory measures will strengthen lending standards and with supply scheduled to increase over the next couple years.”

Overall, despite the inclusion of a data dependent clause in the statement market based expectations of whether there will be a rate cut in August actually showed a fall in probabilities to 57% from 66% prior to the meeting.