April 20, 2021 11:20 AM

Is the Australian Dollar ready for another potential rate cut?

On October 1st 2019 the Reserve Bank of Australia is expected to cut rates a third time in the current easing cycle to 0.75%, as pressure mounts from the market to step in to aid the slowing domestic economy. The RBA cut the cash rate from 1.5% down to 1% through two back-to-back cuts in June and July 2019, but subsequently paused to assess their effect in spurring economic growth, inflation and employment (1)

Since then whilst total employment has improved from stronger participation rates from women and older citizens, the unemployment rate has remained stubbornly constant at 5.2%, well above the RBA’s full employment target rate of 4.5%. This rate then worsened to 5.3% in last week’s data release for August, and due to its significance in their policy decision-making the market’s expected probability of a cut in October jumped to 80% (2). In a speech on Tuesday night Lowe all but confirmed that further cuts would be required, although did suggest that the Australian economy was at a ‘gentle turning point’ (3). The reasoning he gave for further cuts was in part due to the limited effects of the prior rate cuts and weak growth prospects, but also the current global landscape for interest rates. He said that if the RBA ignored the current environment of low interest rates, and did not continue easing, the Australian dollar would appreciate and "be unhelpful in terms of achieving both the inflation target and full employment.." (4)

The RBA has repeatedly requested assistance from the Federal government in shouldering the burden of delivering economic growth outcomes, due to the diminishing returns of cutting already historically low interest rates(5). Treasurer Josh Frydenberg last week announced that there was a small $700m deficit in the past fiscal year, and that he was committed to achieving a surplus in 2020 – therefore reluctant to step in with fiscal stimulus (6). In contrast, over the weekend PM Scott Morrison said that he was prepared to adjust the budget to be more supportive in a global environment with a prolonged trade war, which President Trump suggested in their meeting may be the case (7). The consensus amongst economists appears to be that fiscal stimulus will be more effective in revitalising the domestic economy than further monetary easing, given that the cash rate is already near the zero-lower-bound(8). CBA’s senior economist Belinda Allen holds this view, and suggests the federal government bring forward the tax cuts scheduled for FY2023 and “shovel ready infrastructure projects,” particularly in regional Australia (9). If the RBA’s dual mandate of full employment and inflation in the 2-3% band can be achieved through fiscal stimulus, the necessity for further cuts or quantitative easing will be reduced (10).

If the RBA cuts more or faster than the market is expecting this could result in a lower exchange rate, due to worsening interest rate differentials between Australia and the US. As of 12pm 26th September the market is expecting a 76.5% chance of an October cut to 0.75%, and another cut to 0.5% by April-May 2020 (11). If expectations of this easing schedule are accelerated and other factors are ignored, this could reduce the exchange rate – making the RBA commentary accompanying the October rate decision of utmost significance (12).

For your free FX consultation or if you need more education on currency risks and hedging instruments, contact the Moneytech FX team, FX@moneytech.com.au or 1300 939 068.

(1) Reserve Bank of Australia. (2019). August – Minutes of the Monetary Policy Meeting of the Board. [online] Available at: https://www.rba.gov.au/monetary-policy/rba-board-minutes/2019/2019-08-06.html [Accessed 26 Sep. 2019].
(2) ASX. (2019). ASX RBA Rate Indicator – October 2019. [online] Available at: https://www.asx.com.au/prices/targetratetracker.htm [Accessed 26 Sep. 2019].
(3) Lowe Governor, P. (2019). An Economic Update. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/speeches/2019/sp-gov-2019-09-24.html [Accessed 26 Sep. 2019].
(4) Lowe Governor, P. (2019). An Economic Update. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/speeches/2019/sp-gov-2019-09-24.html [Accessed 26 Sep. 2019].
(5) Kehoe, J. (2019). Lowe and Frydenberg split on stimulus. [online] Australian Financial Review. Available at: https://www.afr.com/policy/economy/lowe-and-frydenberg-split-on-stimulus-20190822-p52jx0 [Accessed 26 Sep. 2019].
(6) Stayner, T. (2019). Josh Frydenberg reveals shrinking deficit in budget outcome. [online] SBS News. Available at: https://www.sbs.com.au/news/josh-frydenberg-reveals-shrinking-deficit-in-budget-outcome [Accessed 26 Sep. 2019].
(7) Coorey, P. (2019). Morrison falls in behind Trump’s trade war. [online] Australian Financial Review. Available at: https://www.afr.com/politics/federal/morrison-falls-in-behind-trump-s-trade-war-20190922-p52tnl [Accessed 26 Sep. 2019].
(8) Heath, M. (2019). RBA’s Lowe Comes Under Increasing Pressure to Cut Rates Below 1%. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2019-09-23/rba-s-lowe-faces-lonely-rate-cut-route-as-fiscal-road-blocked [Accessed 26 Sep. 2019].
(9) Heath, M. (2019). RBA’s Lowe Comes Under Increasing Pressure to Cut Rates Below 1%. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2019-09-23/rba-s-lowe-faces-lonely-rate-cut-route-as-fiscal-road-blocked [Accessed 26 Sep. 2019].
(10) Jericho, G. (2019). Australia’s slowing economy: how should the government and Reserve Bank respond?. [online] The Guardian. Available at: https://www.theguardian.com/business/2019/sep/21/australias-slowing-economy-how-should-the-government-and-reserve-bank-respond [Accessed 26 Sep. 2019].
(11) This is the implied probabilities derived from 30 Day Interbank Cash Rate Futures. Data sourced from Reuters.
(12) Commins, P. (2019). The RBA’s new policy tool is having a big impact. [online] Australian Financial Review. Available at: https://www.afr.com/markets/debt-markets/the-rba-s-new-policy-tool-is-having-a-big-impact-20190729-p52br9 [Accessed 26 Sep. 2019].

The Information has been prepared by Moneytech FX Pty. Ltd. (ABN 26 151 337 852) as the Authorised Representative of Moneytech Limited (ABN 77 106 249 852) under Moneytech Limited’s Australian Financial Services licence (AFSL No.: 421 414). The Information has not been prepared taking into account your financial objectives, situation or needs, nor does Moneytech FX Pty. Ltd. purport to provide you with any investment, legal or tax advice. The Information does not constitute any offer, recommendation or solicitation to you or any person to enter into any transaction, hedging, trading or investment strategy, nor does it constitute any prediction of likely future movement in rates or prices or any representation that any such future movements will not exceed those shown in the Information.

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