Australian Central Bank Rate Decision Preview

August 3, 2009

More than with most monthly meetings, the Australian dollar’s near-term fate hinges on Reserve Bank’s policy decision, due Tuesday at 04:30 GMT.  The central bank undoubtedly will leave its cash rate at 3.00%, which is the level since a 25-basis point cut on April 7.  In four moves from early October to early February, the cash rate was reduced at consecutive meetings by 100 basis points three times and 75 bps the other time.  The first cut last September, like the last cut in April, were reductions of 25 basis points.  The impact of this considerable amount of monetary stimulus has been far from fully felt, and it will be complemented by strong fiscal stimulus that’s also still boosting Australia’s economy.  A third big boost is coming from the strengthening of Chinese demand, and a fourth stems from firmer commodity prices.  At the July meeting, policymakers conceded that downside growth risks had diminished considerably, and official speeches subsequently have observed that growth has developed above the path expected early in 2009 and conveyed that growth risks are in close balance.

The Australian dollar is 6.7% stronger than it was at the time of the July meeting and has recovered a whopping 40% from a low in late October 2008 of $0.6009.  Some of the A-dollar appreciation reflects confidence that tonight’s statement, unlike those after earlier meetings, will not leave the door open to more rate cuts.  Speculators are betting specifically that officials will not explicitly repeat that scope for easing remains if such is needed.  Officials already have hinted that the Reserve Bank may be one of the first central banks to begin tightening.  Among new data developments since the July meeting,

  • Consumer confidence was reported to have shot up 12.7%, the most for any month in 22 years,
  • Business sentiment climbed above zero for the first time in 18 months,
  • Housing credit was announced to have risen by an ample 7.1% in the year to June,
  • New motor vehicle sales posted a 5.7% on-year rise in June, more than expected,
  • Quarterly CPI figures showed an uncomfortably high and sticky core rate of 4.2% on one gauge and 3.6% on another,
  • Expected inflation for the next twelve months rose to 3.2% from 2.8% in prior survey, and
  • Job ads recorded a much slower rate of decline.

The Aussie dollar’s sharp appreciation represents a factor that may disappoint those looking for a more hawkish policy stance.  That was certainly the case in New Zealand recently.  Surprisingly dovish remarks from Australia’s Reserve Bank would catch a market positioned for restraint and a strengthening exchange rate.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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