Australian Dollar Sinks After RBA Minutes Hint at Interest Rate Cut

The Australian dollar fell against all other of its most-traded rivals, including commodity currencies, after the minutes from the Reserve Bank of Australia made market participants believe that the central bank will cut interest rates in the near future.
The RBA released minutes of its December 3 monetary policy meeting today. While Australian policymakers left interest rates unchanged at the meeting, the minutes were dovish enough for analysts to speculate that the central bank will cut rates, perhaps as soon as at the February meeting. Wage growth was the particularly big concern for rate-setters as the notes said:

It was noted that the current rate of wages growth was not consistent with inflation being sustainably within the target range, unless productivity growth was extraordinarily weak, nor was it consistent with consumption growth returning to trend.

The members of the Reserve Bank Board discussed the negative impact of lower rates on the sentiment:

Members also discussed community concerns about the effect of lower interest rates on confidence, noting the decline in business confidence and consumer sentiment this year.

Ultimately though, they decided that the negative impact does not outweigh the positive influence on the economy:

While members recognised the negative confidence effects for some parts of the community arising from lower interest rates, they judged that the impact of these effects was unlikely to outweigh the stimulus to the economy from lower interest rates.

Westpac Banking Corporation commented on the minutes:

These minutes strengthen our conviction that the Board would be comfortable easing rates further at the February meeting. The flow of economic data over the next six weeks will be critical to that decision, particularly the labour market; retail sales and confidence.

Given our forecasts, Westpac is comfortable with our current view that the RBA will reduce the cash rate from 0.75% to 0.50% at the February Board meeting.

AUD/USD dropped from 0.6884 to 0.6849 as of 17:54 GMT today. EUR/AUD climbed from 1.6182 to 1.6280. AUD/CAD tumbled from 0.9054 to 0.9006.

If you have any questions, comments, or opinions regarding the Australian Dollar, feel free to post them using the commentary form below.

Leave a Reply

Your email address will not be published. Required fields are marked *