RBA easing taking some of shine off Aussie – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Australian dollar has declined sharply in the Asian trading session following the announcement overnight from the RBA that it has decided to lower its key policy rate by a further 0.25 percentage point to 1.75%.

Key Quotes

“Market expectations for further easing had picked up materially in advance of the meeting following the release of the much weaker than expected Australian inflation report for Q1 although the probability of a rate cut today was still seen at round 50:50.

The RBA clearly signalled in today’s policy statement that lower than expected inflation pressures was the main justification for delivering further easing. The RBA stated that “while the quarterly data contain some temporary factors, these results, “together with ongoing very subdued growth in labour cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast”. The RBA’s updated forecasts for the economic outlook will be released later this week.

The RBA also signalled less concern over the potential risks of lower interest rates for the housing market which were judged as less than a year ago. The RBA noted that price pressures in the housing market have tended to abate driven by the effects of supervisory measures that are strengthening lending standards. It has made the RBA more comfortable about lowering rates further.

The decision to lower rates highlights that the RBA is now placing greater emphasis on low inflation than supporting economic activity in setting monetary policy. The RBA’s description of the economy was left largely unchanged. The RBA acknowledged that their forecasts for global growth have been revised down a little further recently and that labour market indicators have been more mixed of late but not enough on their own to justify further easing.

If low inflation continues to prove more persistent than expected then the RBA is likely to become more sensitive to domestic currency strength and to implement further monetary easing. The RBA will be pleased that the Australian dollar has weakened following today’s decision to lower rates which at the margin will undermine its’ carry appeal. However, overall market conditions are not supportive for more sustained weakness in the Aussie. The Aussie is still deriving support from the recent rebound in commodity prices and more dovish Fed policy stance. The RBA acknowledged that policy stimulus in China is helping to provide more support for demand in the near-term.”