RBA is Poised to Lower Rates


There is increasing speculation that the Reserve Bank of Australia will reduce interest rates at its meeting next week. What had been a clear-cut case for steady policy has been shaken up by accommodative action from big central banks and falling commodity prices. The most prominent driver of RBA easing expectations was the shock rate cut from the Bank of Canada. Taken all together, there is now a compelling rationale for an insurance easing next week, as Australia’s growth outlook has taken a hit amid lower commodity prices and slowing in China.

At their last meeting in December, the Reserve Bank of Australia stated with their forward guidance that there would be no change in rates for an extended period. With central bank speaking out for the first time since their last meeting, there have been none of the usual sign-posts to go by with respect to the current outlook of the bank. But the plunge in commodity prices and flurry of central bank easing does not bode well for Australian growth in the first half of 2015.

Of course, Australia’s economy held up fairly well through Q3 of last year, notching a 2.7% year over year rate that matched the pace in Q2. Growth is seen slowing slightly to 2.5%, leaving a still solid pace of annual growth. Yet similar to Canada, the outlook has dimmed for growth in the first half of this year. In December, the RBA had expected growth to run a bit below trend for the next several quarter. The sharp decline in commodities and ongoing signs of slowing in China should lower that estimate, especially in the first half of this year.

The Australian dollar has continued to depreciate, moving to a four year low of 0.7858 Monday before rebounding to just above 0.7930. The currency has lost 3.5% from the January peak of 0.8221 and is 16% below the 2014 peak of 0.9443. The RSI is improving after printing in oversold territory and currently at a reading of 36, which is the lower end of the neutral range.

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