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Australia: Cash rate stuck at 2%, for now - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 2, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Andrew Ticehurst, Research Analyst at Nomura, notes that the Reserve Bank of Australia (RBA) again elected to leave the cash rate at 2% today, as was widely anticipated.

    Key Quotes

    “We read its press release as very much in line with expectations, and with continuing “scope” for a lower cash rate “should that be appropriate to lend support to demand”. We continue to believe that a lower cash rate is both warranted and likely this year, and continue to have a 25bp rate cut pencilled in for May. The RBA has signalled that labour market data and financial market “turbulence” – and whether this signals weaker global and domestic demand – will be critical in its cash rate deliberations.

    Much of the RBA statement was very much as expected. Specifically, it:

    • Acknowledged some recent softer global data, by saying that “the global economy is continuing to grow, though at a slightly lower pace than earlier expected”;

    • Noted that commodity prices have continued to decline and that Australia’s terms of trade have continued to fall, reflecting both demand- and supply-side factors;

    • Acknowledged recent, heightened volatility in financial markets.

    On inflation, it stated that underlying inflation was low, at about 2%, and repeated its view that consumer price inflation is likely to remain low over the next year or two.

    It also noted that “the exchange rate has continued its adjustment to the evolving economic outlook”. We read this statement as being fairly similar to its previous comment that “the Australian dollar is adjusting to the significant declines in key commodity prices”.

    Finally, in terms of policy guidance, it again concluded, as expected, that “scope” remained for easier policy, “should that be appropriate to lend support to demand”. However, in concluding, it altered is assessment from early December that economic prospects “had firmed a little over recent months”. Instead, it saw “reasonable prospects” for “continued growth” and indicated that it would be watching, “over the period ahead”, to see “whether the recent improvement in the labour market is continuing and whether the recent financial market turbulence portents weaker global and domestic demand”.

    We continue to think that another rate cut is more likely than not, and note:

    • Nomura’s below-consensus view on China and Korea and expectations for rate cuts in Asia;

    • Risks that these rate cuts prevent the trade-weighted index from falling further;

    • Our below-consensus view on Australia and belief that recent real GDP and labour force reports somewhat overstate the health of the local economy; and

    • The capacity for a global market shock, in an uncertain world, to effectively take the rate cut decision out of the RBA’s hands.”
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