How Economic Factors are Affecting the Official Cash Rate

 admin  0comments  08.04.2016

The Reserve Bank of Australia (RBA) announced last week that it will hold the official cash rate at 2% in April, despite a persistently strong Australian Dollar (AUD) threatening a cash rate cut.

 

The AUD reached an eight month high of USD $0.77 early last week. According to Eliza Owen, Market Analyst, Onthehouse.com.au, “The strength of the AUD is partly due to a global currency battle, where many central banks around the world are simultaneously trying to lower the value of their currencies relative to others, in order to attract more exports. This mitigates the ability of the RBA to devalue the currency in Australia through further cuts to the cash rate. Even though Australia’s cash rate is at a historically low level, it remains high relative to other countries such as Japan, where rates are in negative territory."

 

“Another boost to the AUD came from rallies in commodities over March. While most commodities are still well below the high levels in 2014, the last month saw increases in the index of natural gas (21.1%), iron ore (3.1%), coal (1.2%) and crude oil (1.1%).

 

“Increases in price for Australia’s export commodities may help boost economic activity in the short term, as well as increase demand for the AUD, thus aiding its buoyancy.

 

“Growth in resource revenues may have offset a need to try and reduce the currency value for April, which in turn may have contributed to the hold decision.

 

“Further movements in the AUD, which will impact future cash rate decisions, will be contingent upon cash rate movements in the United States as the USD is a major currency competitor.”

 

Other positive indicators for the Australian economy include an increase in the number of job vacancies, which trended up sharply by 3.1% in the February 2016 quarter, while the unemployment rate decreased from 6% in January to 5.8% in February.

 

The Australian Industry Group’s Performance of Manufacturing Index (PMI) rose 4.6 points in March, to 58.1 – the highest level since April 2004.

 

“Recent optimism in Australia’s economy has come from increased activity in tourism, real estate and services, which is helping to offset losses in the resource markets,” says Owen, “I anticipate revenues in real estate will come down over the remainder of this year, but any further cuts to the cash rate may be dangerous in fuelling further debt rather than stimulating the economy.

 

“Data from the ABS shows that Australia’s debt to income ratio rose in 2015, and Moody’s rating agency also reported that it expected a rise in the delinquency rate in home loans in 2016. This could keep pressure on the RBA to maintain the cash rate rather than lower it further.

 

“While a cash rate cut may temporarily help prop up further growth in the housing market, with such high levels of debt further growth would only lead to more pain in the economy down the track. Many economists expect that the cash rate will remain at 2% until as late as May next year, as pressure on the housing market slowly eases and other indicators slowly improve.”

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