Tuesday, 01 August, 2017
MNI INSIGHT: RBA May Use Scope to Lower Rate if AUD Stays High
–Other Cenbks’ Tightening May Not Hinder RBA Ease if Need Seen
By Sophia Rodrigues
SYDNEY (MNI) – The Reserve Bank of Australia has the scope to lower the cash rate further and is prepared to use that scope if there are signs the appreciating exchange rate is dampening growth and inflation.
Importantly, the RBA would cut even if other central banks are tightening because its main focus is on the domestic economy.
As Deputy Governor Guy Debelle said in a speech last month, "Ultimately, in Australia as is the case elsewhere, policy rates are set at the level assessed to be appropriate to achieve the domestic policy objectives. While global influences, including monetary policy settings in other economies, have a significant impact on that assessment, they are, in the end, only one of a number of considerations to be taken into account."
The only main hindrance for further easing would be the housing market but those risks are getting dealt with by supervisory measures that have resulted in some tightening of credit conditions and higher interest rates for residential property investors. Over time, their effect is expected to be seen.
For now, the RBA is prepared to wait and see on how its updated forecasts that are largely unchanged versus May, pan out. The risk of a cash rate cut will increase if the next set of forecasts for the November Statement on Monetary Policy lead to downgrades for growth and inflation because of a high exchange rate.
At the board meeting Tuesday, the RBA left the cash rate unchanged at 1.5% and made clear its concerns about the rising Australian dollar by pointing out that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."
More clarity on the RBA’s thinking would be available in the Statement on Monetary Policy that will be published on Friday, and based on which Tuesday’s cash rate decision was made. The statement is expected to contain details on how the high exchange rate, if it sustains, would affect the forecasts.
The exchange rate, along with low level of interest rates, has been a key factor in the economy’s transition following the mining investment boom. The RBA has consistently said that the "depreciation of the exchange rate since 2013 has (also) assisted the economy in its transition following the mining investment boom."
The impact of that depreciation has slowly been winding back as time passed but the recent appreciation means the currency could now become a drag, instead of supporting the economy.
The RBA may seek to reduce this drag through a lower cash rate, which could also have an additional impact by putting downward pressure on the Australian dollar.
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