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Although the RBA lowered the official cash rate by 25bp at both the November and December meetings, the likelihood is that it will opt for a further rate reduction when it meets tonight. As confirmed by last night’s retail sales figures, the consumer remains extremely reluctant, with turnover hardly changed over the final quarter of last year. The labour market is sluggish, house prices are declining, global financial conditions have tightened and inflation pressures have moderated. It is fairly clear that the economy needs a further dose of monetary medicine, if only to counterbalance a more restrictive fiscal policy.
Another cut in official rates of 25bp to 4.00% is largely factored in by the currency and as such is unlikely to elicit much of a response. Indeed, the decline in the Aussie overnight to below 1.07 had more to do with the strength of the dollar in response to Friday’s very respectable US employment figures and the weakness in the euro amidst growing concerns over the latest developments in Greece. In relative terms, the Aussie is still doing very well – against the single currency, it is below 1.22, and vs. the pound it is at 1.47.
All things considered, both traders and investors still hold the Australian currency in relatively high regard, notwithstanding the domestic economic challenges.
