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RBA: Lower Interest Rates Could Prevent AUD Rallies

September 11, 2016 by Richard Cox in Business with 0 Comments


The Reserve Bank of Australia (RBA) recently released its monetary policy statement on September 6th, 2016 and kept its cash rate at record low of 1.5 percent.  Policymakers expressed the belief that in order to sustain the current pace of growth and to achieve the bank’s inflation target, a dovish stance will need to be maintained until more economic data becomes available.  Over the last year, interest rates dropped from 2.5 percent to the current 1.5 percent rate in order to fuel economic growth, stabilize the employment rate and achieve the bank’s inflation target.

Chart View:  Australian GDP Rates

Australia’s GDP grew by 0.5 percent in the second quarter of 2016, which was lower than the market expectations of 0.6 percent. The June GDP report also came in lower than the previous quarter (1.0 percent), making it the slowest growth performance since June 2015. The slower pace was negatively influenced by reduced net trade values, flat investment, and steady consumption. These factors likely will limit any potential upward revisions in interest rates before the end of  this year.

Since the Australian economy is closely tied to the value of commodities (specifically, metals prices) it is often a good idea to track the performances seen in the country’s largest mining companies.  One of the better examples here is BHP Billiton (NYSE:BHP), and most of the trends seen with the company have been solidly encouraging.  According to market data reports from  Fintel.io, we can see that fund ownership of BHP Billiton is rising and this suggests that institutional investors are increasingly looking for ways of buying into these supportive trends.

The inflation rate for Australia rose by 1 percent in the June quarter, lower than the previous quarter’s rate of 1.3 percent and below consensus estimates. At the same time, Australia Business Confidence index fell to 4 in July 2016 due to worsening business conditions and profitability.  Despite the recent BREXIT event and the federal election (which is being viewed as a potential sentiment dampener), businesses continue to exhibit positive confidence readings, and this could lead to more investments in domestic companies.

The overall consumer inflation rate is now seen at levels that have not been posted since 1999, and this is essentially something that gives the RBA little room to maneuver with respect to upward rate adjustments in coming future.

RBA’s Economic Positives

Perhaps the strongest area of performance can be seen in the consumer confidence index, which came at 101 in August 2016.  This equates to a rise of 2 percent (compared to a drop of 3 percent in July 2016). The report shows that there is an expectation supportive economic conditions over the next twelve months, and this is something that might allow some room for rate adjustments if Reserve Bank of Australia sees changing conditions.

GDP growth in Australia’s largest international trading partners is expected to be slightly below the broader averages over the next few years.  This could continue to dampen external demand from trade partners if Australian consumers are less interested in buying foreign products.  Overall, the RBA is expected to continue with its dovish stance until some of these key economic areas start to show greater improvement.  If this does not occur, we would see prolonged weakness in currency pairs like the AUD/USD and the AUD/NZD.

 

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