Against our expectations the RBA decided to cut the cash rate by 0.25% to 3.25% already at today’s meeting rather than at the October meeting followed by a new Monetary Policy Report. Ahead of the decision market pricing indicated roughly a 50/50-chance for a rate cut at today’s meeting.
While the RBA expected inflation to be in line with the target in medium term the decision to cut the cash rate today should be seen against a somewhat weaker international outlook and the strong currency.
The RBA assessed that growth in China as well as around Asia in general had slowed in recent months and uncertainty had increased. Although the Australian economy had continued to grow around trend prospects for future growth had turned more uncertain as key commodity prices had dropped significantly reducing terms-of-trade and would probably continue lower according to the statement.
Moreover the RBA expects resource related investments to peak over the next year at a lower level, which is a little earlier than previously thought. Therefore they stressed the importance of a pick-up in other, more domestically oriented, components of demand.
In addition RBA noticed that credit growth had softened lately and that the AUD exchange rate had remained higher “than might have been expected given the observed decline in export prices”. For a while the RBA has been more concerned about the strong currency no longer supported by higher export prices, which probably is one important reason behind today’s cut.
Going forward we expect the RBA to continue to ease monetary policy to reduce the pressure from safe haven inflows and commodity investments on its currency as long as key export prices remain under pressure and the currency remains high. We would therefore not exclude the possibility of another cut already in November followed by one more cut in February to 2.75%.
The currency has been and still remains substantially overvalued at current levels. To support growth outside the resources sector Australia clearly needs a weaker currency. We therefore stick to our forecast that the AUD is likely to continue lower and we target parity or below against the USD within the next 3-6 months.
SEB