Why Did RBA Not Cut?

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Market Drivers March 2, 2015

RBA suprises by keeping rates on hold
EUR PPI bit lower on energy but other areas show increase
Nikkei -0.06% Europe 0.14%
Oil $50/bbl
Gold $1208/oz.

Europe and Asia:
AUD Building Approvals 7.9% vs. -1.8%
AUD RBA rates on hold
GBP PMI Construction 60.1 vs. 50.9
EUR PPI -0.9% vs, -0.7%

North America:
CAD GDP 08:30

The Reserve Bank of Australia surprised the market by keeping rates on hold at the 2.25% level against the consensus view that it would cut another 25bp off the benchmark rate. In its statement the central bank acknowledged that growth remains below trend pace, but judged that it was appropriate to keep rates stationary for now.

Although the majority of economists surveyed by Bloomberg predicted that the RBA would ease further today, the RBA generally does not like to engage in sequential rate cuts, preferring to let its policy waah over the Australian economy for several months before taking any additional action.

One key reason for RBA’s reluctance to ease further may be the fear of stoking another bubble in the housing market. Today’s Building Approvals figures which jumped 7.9% versus -1.9% eyed were just the latest signal that the housing market is becoming overheated even as the general economy remains in a malaise.

The RBA therefore is walking a fine line between trying to stimulate the broad economy while keeping housing in check. Today decision was likely governed by the need to curb excessive speculation in that sector and the central bank resort to macro prudential measures to temper the rise in housing while at the same time seeking to make more credit available to the general economy.

The Aussie initially popped nearly 100 points in the aftermath of the release. Indeed the pair began to rise sharply just ahead of the news suggesting that some speculators may have gotten word of the release a bit sooner. However, the rally in the pair withered around the 7840 mark and the unit fell back towards the 7800 figure as traders quickly took profits.

The RBA was quick to note that it would consider another rate cut in the foreseeable future and stated that the exchange rate remained too high, noting that further drop in AUDUSD was necessary to balance growth. The market’s attention will now turn to Wednesday’s GDP data which is expected to rise by 0.7% vs. 0.3%. If the number meets the forecast the Aussie could squeeze higher and make a concerted effort to take out the .7900 figure. However, if – as many market participants suspect – the GDP numbers miss their mark the market will begin to price in the resumption of rate cuts at the next meeting and the downward pressure on Aussie is sure to resume.

Boris Schlossberg
Managing Director

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