logo

Economic Update

RBA on hold for the eleventh month in a row, but rising $A seen as presenting complications

07 Apr 2016
From

In its Statement accompanying the decision, the RBA again made very little changes and retained an easing bias. However, it did acknowledge the recent improvement in commodity prices and financial markets and dropped the reference to assessing the impact of financial turbulence on the economic outlook.

Significantly though the RBA singled out the rise in the value of the Australian dollar, which is up 6% since the last meeting, devoting a whole paragraph to the currency as opposed to a single sentence in last month’s Statement. In noting that an appreciating Australian dollar could “complicate the adjustment underway in the economy”, the RBA has effectively reintroduced a subtle form of jawboning designed to try and push it back down again. The clear implication is that a further gain in the value of the $A could cause the RBA to act on its bias to cut interest rates again.

Our view remains that the RBA will indeed cut interest rates again in the months ahead for four reasons. First, growth is likely to slow back to around 2-2.5% as the contribution from housing fades reflecting falling building approvals (see the next chart) and fading wealth effects at a time when mining investment is still contracting. Second, unemployment is likely to remain relatively high at around 6% with jobs growth slowing. Third, inflation is likely to remain at or below the bottom of the RBA’s 2-3% inflation target. And finally, the recent rebound in the value of the $A is a threat to trade exposed sectors like tourism, higher education and manufacturing helping to fill the growth gap left by a slowing housing sector. Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the $A could set the scene for a May rate cut, which is our base case, or failing that it could be delayed into the September quarter.

image004
Source: ABS, AMP Capital

 

However, whether there is another rate cut or not from the RBA, it remains very hard to see rate hikes any time soon. So the period of low interest rates is set to continue.

 

image005a

Source: ABS, AMP Capital

 

Shane Oliver, AMP Capital

Tags:

Earn CPD Points

  • CPD: A TTR strategy for modern retirement

    We are currently witnessing one of the most significant demographic transformations in Australia’s history. Over the next decade, an estimated 2.5 million Australians are expected to enter retirement[1]. This article, [...]

  • CPD: Trend following in uncertain times

    Trend following strategies aim to generate returns by capturing sustained price movements across a diverse range of asset classes. Unlike traditional investment approaches that rely on valuation or forecasting, trend [...]

  • CPD: Aged care advice and ethics

    Data from the Australian Institute of Health and Welfare (AIHW) shows that Australia’s population aged 65 and over is projected to reach 22% – or 8.8 million people – by [...]

  • CPD: AI governance – a practical framework for advisers

    Regulator scrutiny of AI governance just got serious In years to come, they may well call it the ‘Mythos effect’ – the point in early 2026 where all the concerns [...]

  • CPD: Thinking outside the box – providing a loved one a paycheque for life

    Australia’s great wealth transfer is well underway. An estimated $5.4 trillion is expected to pass from those aged 60 and over to younger generations within the next two decades.[1] In [...]

View more CPD