The RBA isn’t finished loosening monetary policy

February 6, 2015

The Reserve Bank of Australia released its latest quarterly monetary policy statement earlier in the Asia session. The statement included revised inflation and growth forecasts and underscores the likelihood that the RBA will cut interest rates at least once more this year. Yet, the revised economic forecasts aren’t as low as the market was expecting, thus the Australian dollar had a broadly positive reaction to the report.

The bank said that its forecasts are based on the assumption that the OCR rate broadly moves in line with market expectations, and the OIS market indicates at least one more 25 bps cut is due before year-end. Core inflation is now expected to between 2-3% by December, as opposed to 2.25-3.25% in the RBA’s prior quarterly MPS. Also, the bank now projects that the economy will back to trend-growth by 2016.

Falling oil prices are a good thing for Australia in the long-run

The massive statement also outlined how lower oil prices are beneficial for the Australian economy in the long-run. Australia is a net importer of oil and lower prices are expected to soften the cost of living and offset any negative impact to households from a lower exchange rate – a lower exchange rate increases the cost of imports, thus prices rises domestically. What the bank can’t say is when the benefits from cheaper fuel will find their way into the real economy. In the short-term, falling oil prices are clearly deflationary and contribute to Australia’s soft inflation outlook.

The aussie

AUDUSD jumped as high as 0.7860 immediately following the release of the MPS, before the pair settled around 0.7820 later in the Asia session. In the long-run the impact on the Australian dollar should be fairly limited as the report doesn’t tell the market much more than it already knows. In fact, the RBA went as far as confirming the market’s prior assumptions about interest rates.

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