Australian dollar shackled as market locks in two rate cuts

Mae Love
May 23, 2019

"Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates", he said.

In a lunchtime speech to economists in Brisbane, Philip Lowe said the RBA had decided at its last meeting that inflation would not rise back to the 2-3 per cent target unless unemployment fell.

Markets have priced in an nearly certain rate cut by the Reserve Bank of Australia (RBA), predicting a 1.5% cash rate decision when its board meets on June 4, .

Since unemployment rose from a low of 4.9 to 5.2 percent according to the last labor market data, Lowe suggested that a higher interest rate would help to fix the unemployment problem and to keep inflation that is "consistent" with the target.

The Australian dollar ticked as much as 0.2 per cent lower against its USA counterpart on the release of the minutes, but Dr Lowe's more pointed comments pushed it lower by another 0.6 per cent.

Australian government bond futures eased a touch but were still near historic peaks. Accordingly, in order to extract ongoing "dividend" from the rate cut cycle it seems likely that the August RBA decision will not preclude further action.

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In the meantime, comments by influential FOMC members - including the Fed Chair Jerome Powell, might provide some insight over the central bank's intention to react to escalating trade disputes and produce some meaningful trading opportunities. The three-year bond contract dipped 1 tick to 98.815, while the 10-year contract lost 2.5 ticks to 98.3300.

"Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure", the minutes said.

Lowe said the Australian economy had already slowed due to weak household income and spending growth.

Overlaying the downturn Down Under has been a tumble in house prices that has eroded household wealth and added to nervousness among consumers.

"Over the past year, global trade has not grown at all", Lowe noted. "This recent weakness partly reflects the slowing in the Chinese economy, but the increases in US and Chinese tariffs are also a factor".

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