The Reserve Bank of Australia kept its overnight cash rate on hold at 2% at its scheduled policy meeting on Tuesday. The no change was widely expected by analysts but markets are pricing in one more cut by the end of the year following two quarter point cuts in February and May this year.
The statement that followed the rate announcement was dovish in tone as the Governor Glenn Stevens maintained his view that the Australian dollar needs to depreciate further, despite significant declines already over the past year. The case for further depreciation has strengthened in the past month as iron prices have plunged further by over 20%. The slowdown in the Chinese economy and negative developments with Greece pose additional risks to the Australian economy.
The impact of falling commodity prices has not been as damaging as expected though with the economy continuing to grow and unemployment stabilizing. Lower rates have also started to help support borrowing and spending. However, Governor Stevens noted that the economy is still “operating with a degree of spare capacity”.
The biggest concern for the RBA from additional rate cuts is the overheating property market, particularly in Sydney and to a lesser extent in Melbourne. Falling borrowing costs have stoked house prices further. Although there appears to be signs that the rise in housing lending has been steadier in recent months.
The Australian dollar initially rose against the dollar after the rate decision but soon continued on its descent to hit another six year low. The aussie has been on a long-term downwards path since April 2013. It hit a low of 0.7424 during the day before recovering somewhat to 0.7440. Against the kiwi, the aussie has been surprisingly resilient as the New Zealand economy has itself been hit by falling commodity and dairy prices. The aussie was last trading at 1.1197 against the New Zealand dollar.
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