This morning RBA has decreased key interest rate for the first time since June 2015. The rate was lowered to 1.75%. Before this decision was taken, market participants’ opinion about this possibility was divided equally.
Possibly the Central Bank decided to lower interest rate because of the weak inflation data released last week. Recall that base annual inflation amounted to 1.7% against the forecast of 2.0% and the rise of 2.1% in the previous quarter. Consumer price index (CPI) in Q1 last went down to -0.2% against the forecast of 0.3%. On annual basis the rise was 1.3% against the forecast of 1.8%.
The decline in the inflation rate and low rate of the wages increase may prevent the achievement of the target inflation rate of 2%-3%. According to the Bank, Australian economy is growing at a slower pace than in 2015. The last labor market indicators were mixed. RBA stated that the rise in the AUD might impede economic situation in the country.
Obviously, expensive price of the AUD started to worry exporters of the country. For the Australian economy, which is focused on exports, cheap national currency is beneficial. Meanwhile, Australian economy tries to refocus from the mining industry to the other sectors, while sharp rise in the AUD this year has created additional threat to GDP growth. However, the Bank did not give clear indication whether the decline in the interest rate will take place this year or not. It is possible that the risk of overheating in the housing market will force the Central Bank not to lower interest rate once again.
Although the pair AUD/USD fell by almost 2.0%, to 0.7560 after the decision to decrease interest rate by RBA, some market participants believe that the pair will soon regain positions and it makes sense to consider placing long positions in the medium-term. The US Fed does not give clear indication of the interest rate increase. At the same time, the rise in price of commodities, including ore iron, which is the main item of the Australian export, and attractiveness of the Australian state bonds can cause further rise in the AUD.