After much speculation and economists pricing in a 75% chance of a second rate cut for 2015; the Reserve Bank of Australia (RBA) has elected to keep the official cash rate on hold at 2.25%.
The decision to keep rates on hold for April comes amid falling iron ore prices, below average growth, rising unemployment and weak business and consumer confidence; all impacting the growth of the greater Australian economy. The pressing question now will be not ‘if’ there is another cut to the cash rate, but ‘when’ we see another rate cut, with numerous economists still forecasting the cash rate to hit a low of 1.75% by the end of the year and many predicting the next cut will be as soon as May.
Governor of the RBA Glenn Stevens was quoted as saying “the Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, 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”.
Governor Stevens went on to fuel speculation of further rate cuts by saying that “at today’s meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.
The Australian Dollar exchange rate was volatile against most currencies leading into the RBA announcement with the Australian Dollar to US Dollar (AUD/USD) exchange rate starting the day at a low of 0.7572 US Dollars and surging back to hit 0.7711 US Dollars immediately following the announcement.
The Australian Dollar exchange rate lost ground during the overnight session off the back of the RBA making it clear that it was still inclined to cut rates in the coming months. At 0630 AEST on Wednesday, the Australian Dollar to US Dollar exchange rate (AUD/USD) was trading at 0.7630 US dollars, down from 0.7693 on Tuesday.
The Australian Dollar to New Zealand Dollar rallies after RBA announcement
The Australian Dollar to New Zealand Dollar (AUD/NZD) started the day on Tuesday amongst much speculation that the New Zealand Dollar (NZD) was going to hit parity against the Australian Dollar (AUD).
All indicators were pointing in that direction with the New Zealand Dollar hitting an all time high of 1.0063 NZ Dollars. However, the Australian Dollar rallied off the back of the RBA rate decision and immediately following the decision had recovered to 1.0219 NZ Dollars. The prospects of reaching parity now appear delayed due to the RBA decision to hold rates.
New Zealand Finance Minister Bill English was quoted on Radio New Zealand as saying “parity is a pretty big psychological barrier for the market because they’re in the habit of thinking Australia’s currency is significantly stronger than New Zealand’s, and they’ll take a bit of persuading to get there”.
High level data is light on this week with key announcements expected on Thursday with the Bank of England (BoE) rate decision which is forecast to remain on hold at 0.5%. This will be followed by the Chinese Consumer Price Index (CPI) and Canadian Unemployment figures both released on Friday.