On Tuesday the Reserve Bank of Australia (RBA) elected to keep the official cash rate on hold at 2.25%. The RBA had kept economists guessing leading into the decision, with 60% of economists predicting a rate cut was on the cards.
The Commonwealth Bank, ANZ, Westpac and AMP Capital had been among those forecasting a March cut. The general consensus being the RBA tends to deliver cuts in pairs. Commonwealth Bank senior economist Michael Workman was quoted as saying ‘Usually when they cut rates, they don’t just do one out of the blue and stop. It’s normally two’.
RBA Governor Glenn Stevens was quoted after the announcement as saying ‘The Australian dollar has declined noticeably against a rising US dollar (AUD/USD), though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy’.
At 0700 AEDT on Tuesday morning, the local currency was trading at 0.7769 US cents. By close of business that day the Australian Dollar had gained 1% off the back of the decision to hold rates at 2.25% and was trading at 0.7828 against the US Dollar.
Calls for further rate cuts to stimulate growth.
Australian data released on Wednesday included both annualised and fourth quarter Gross Domestic Product (GDP) figures.
While there was a small improvement on the September quarter, the fourth quarter figure of 0.5% was below the forecast of 0.6%, and wasn’t enough to prevent the annual rate slipping to 2.5%. An annualised figure under 3% suggests a sluggish economy. The GDP report showed that whilst the housing sector and household spending is improving, non-mining business investment is still weak.
AMP chief economist Shane Oliver said more interest rate cuts are necessary to boost business and consumer confidence. Dr Oliver is predicting two more rate cuts from the RBA this year and the Australian Dollar to fall to around 70 US cents by year end. Both of which should assist the local economy.
Earlier this morning the Bank of Canada (BoC) announced they would be keeping rates on hold at 0.75% following January’s stunning 25 basis point cut.
Releases later tonight include The Bank of England (BoE) rate decision as well as The European Central Bank (ECB) rate decision. This is then followed by ECB President Mario Draghi speaking in Cyprus. Both rates are expected to remain on hold at 0.50%.