Reserve Bank of Australia – Interest rates cut to record low of 1.00%
Australian interest rates have been cut to a new record low Triggered by fears of economic slowdown Weak retail data a major trigger Further cuts expected Lack of further guidance encourages markets to speculate on the timing of the next move The Reserve Bank of Australia (RBA) has cut interest rates by another 0.25% to what is now…
- Australian interest rates have been cut to a new record low
- Triggered by fears of economic slowdown
- Weak retail data a major trigger
- Further cuts expected
- Lack of further guidance encourages markets to speculate on the timing of the next move
The Reserve Bank of Australia (RBA) has cut interest rates by another 0.25% to what is now a record low of 1.00%. This is in line with the ‘mood music’ of other central banks. Analyst Michael Hartnett of Bank of America Merrill Lynch counts this to be the 716thcut made by central banks since the global financial crisis.
Philip Lowe, RBA’s governor explained his actions in his statement:
“This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”
Whilst the RBA rate of 1% reflects that the Australian authorities have to date taken a more reserved stance than other central banks, this is the second cut in quick succession. Stephen Letts, reporting for ABC.net.au provided the analysis that:
“Interest rates at 1pc may be new for Australia, but we're just following everyone else into the basement.”
Source: ABC News
The trip to ‘the basement’ may still be some way off. Even at 1%, Australia has higher official rates than most other major economies. The ECB, Bank of Japan and Swiss Central Bank are just three of the authorities with rates at lower levels. Unlike those economies experiencing zero or even negative interest rates, the RBA still has some room to manoeuvre. This will be welcomed as the RBA cuts of 4thJune and 2ndJuly were based off some fairly miserable market data. There are indications that the economic slowdown is gaining considerable momentum – income and spending per person stagnated in Q3 of 2018 and in Q4 it actually fell. During this same time period, annualised economic growth was just 1.0%, which is some distance from the target of 2.75%.
‘New normal’ anyone?
Regardless of the justification for the cut, the long-term chart for Australian interest rates makes interesting reading. Rates are locked into a long-term downtrend that whilst appearing to answer short term problems raises a host of long-term questions.
Comment from the ZeroHedge website takes the view that:
“The fact that negative rates have become the new normal in big parts of the world but haven’t caused the expected behavior change should scare the hell out of everyone.”
As the ECB, along with Sweden, Denmark and Switzerland have held interest rates below zero since 2015, it would be fair to say the policy has been given sufficient time to work. The long-term risk is that the policy leads to the ‘Japanification’ of economies and a situation where there are fewer tools available to manage an economy out of a recession. The armory available to bank governors is seen to be further depleted when the scale of bond buying is considered. The current calculation is that central banks have bought approximately $12.5tn worth of bonds as part of the Quantitative Easing program.
The AUD/USD currency pair
Given the potentially dystopian long term prognosis for the global economy, a lot of traders will be turning to shorter timeframes and looking to book some profits as the AUD currency moves on Tuesday’s announcement.
Interest rate moves are of course a key driver of the forex markets. In the medium and longer term, the increased competitiveness of the Australian economy should (in theory) see a greater demand for Australian goods and services and therefore the AUD needed to purchase them. In the short term ‘hot money’ that is looking for the highest available interest rate quickly moves on to its next home exerting downward pressure on a currency.
Immediately following the announcement by the RBA, the AUD/USD currency pair whipsawed then strengthened. The price rise that followed the announcement might appear counter-intuitive but the July 25 basis point cut has been widely expected and priced into the market. FXstreet referenced the Standard Chartered prediction in the run up to the July announcement:
“We see the RBA cutting rates in July, November and December, taking the policy cash rate down to the likely terminal rate of 0.50%. We have expected the unemployment rate to spike in Q3-2019, necessitating RBA rate cuts, since mid-2018.”
The RBA announcement saw the governor keep his cards close to his chest. Forex website FXstreet.com, highlighting the lack of further guidance to be significant, stated:
“Investors seeking clues for additional rate cuts got nothing but disappointment as the central bank refrains from providing any fresh ideas while citing reasonable global economic outlook.”
With little indication to future moves, it might be a good time to consider historical data. The 12 month chart illustrates the downward channel that the currency pair has been trading in.
The five year chart gives an indication why AUD might be finding support despite the recent rate cuts. The low for that period (dating back to Jan 2016) providing a strong technical support at price level 0.68366
FXstreet picks out the 100 daily moving average as an important indicator. Currently trading at 0.7034, FXstreet suggests that a break through at that level could:
“propel prices to April-end swing high of 0.7070 whereas Multiple levels ranging since mid-May can limit pair’s near-tern declines around 0.6940/35.”
The Pivot and Support levels, along with the five year low show downward price movement would need considerable momentum.
The Australian dollar is strongly linked to the health of the Chinese economy. Whilst the decision to take Australian interest rates to a record low level is largely driven by Australian data, the price action of AUD/USD will be heavily influenced by news from China. The US-China trade war and subsequent trade truce has caused an uptick in AUD volatility over the last week.
Over the next few weeks, a range of other central banks are expected to cut rates. Although Australian interest rates have reached record lows, the RBA will be pleased that they are still some way off zero. Given the potential for a Chinese slow down, the RBA may well need all the tools it can lay its hands on.