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Australian Dollar Falls Following RBA Rate Cut – More Cuts Ahead?

October 1, 2019 2:29 pm | Modified October 1, 2019 2:30 pm
AUD, GBP, USD | BY Ashleigh Fox

Overnight, the Australian Dollar experienced some movement when the Reserve Bank of Australia (RBA) opted to cut interest rates by 25 basis points to 0.75%. The move was largely expected, and came as the third reduction to the cash rate in five months. The Australian Dollar exchange rate initially spiked on the news before falling back as markets reviewed RBA comments. While the Reserve Bank of Australia may be attempting to stimulate low inflation and employment, the central bank may be giving itself a headache in other respects, such as housing. Since the first rate cut in June–which was followed by another in July–house prices in Sydeny and Melbourne have risen by around 3.5%. Meanwhile, inflation has only registered a 1.6% increase.

RBA Governor Philip Lowe commented:

‘The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth.’

However, some politicians have blamed the current government for the lack of Australian economic growth. Labour Shadow Treasurer Jim Chalmers said:

‘Australians are struggling, the economy is growing at its slowest pace in a decade, wages are stagnant, and the RBA is getting no help from the Morrison government.’

The comments echo a similar sentiment made by European Central Bank (ECB) Chief Mario Draghi in recent weeks, who’s suggested that fiscal policy needs to be adjusted in tandem with monetary policy. This is especially important given the global slowdown taking place against a backdrop of a chaotic Brexit and unresolved trade wars between the US and China.

A number of economists expect further rate cuts from the Reserve Bank of Australia this year. Capital Eonomics said:

‘Our forecast is that the unemployment rate will reach a peak at 5.5% in the first half of that year. Meanwhile, we think that global growth won’t accelerate anytime soon. Business confidence will therefore remain muted and investment will probably keep falling. We reiterate our forecast that rates will fall to 0.5% before the end of the year.’

The Pound to Australian Dollar (GBP/AUD) exchange rate is trending in the region of 1.8259, approx 0.50% higher. The US Dollar to Australian Dollar (USD/AUD) exchange rate is trading at 1.4956, approx 0.97% higher.

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