RBA Stands Pat on Rates But Sounds Uncertain On Short-Term Growth Outlook
The Australian central bank has moved to keep its cash target rate on hold at 4.75% as uncertainty regarding growth in the global economy leads the RBA to take a more dovish outlook. The RBA said that most asset prices, including housing, have softened and the near term growth outlook is weaker than it was a few months ago, all leading the RBA to says that CPI is set to decline towards the end of the year. While the RBA did point out some positives in the form of China, solid trade and moderate employment growth the overwhelming feeling of the accompanying statement was one of uncertainty. The RBA said that they have no evidence yet of the effects of US and European problems on other global regions. But they did say “the key question is how softer global growth will damp prices?” and what its implications will be for the medium term inflation outlook.
In the aftermath of today’s largely as expected rate decision and accompanying comments we still believe that the RBA remains positive over the country’s medium-term growth outlook with low unemployment, massive business investment and trade at record highs all supporting inflation. We therefore, continue to view inflationary and interest rate risks to the upside over the medium term. In the near term, however, things could be a little more choppy with an increasingly stormy global backdrop, questions about European solvency and American growth all raising the likelihood that the RBA’s hand will be forced before the end of the year to cut rates. So far the central bank has played down this possibility as much as possible but has given veiled warnings that declining confidence may eventually dampen demand which will in turn lessen upward pressure on inflation in the near term.
The immediate reaction in the Aussie was a jump higher after the market had been positioning for a much more dovish statement from the RBA and intimations of an imminent rate cut. However, with the RBA making no mention of a rate cut and their accompanying statement sounding more uncertain than dovish the Aussie rallied.
On a daily chart, however, we can see that the post-RBA relief rally only managed to lift Aud/Usd off its over-night lows but the pair remains decently offered going into the European session. With the pair looking increasingly like it is carving out a lower top after last weeks highs we maintain a bearish outlook for the pair. As the storm clouds continue to gather over Europe and the US and investors increasingly seek safety riskier assets, like the Aussie dollar, are likely to be hurt. For a full technical outlook.
Written by Jonathan Granby, DailyFX Research Team