RBA Remains Neutral But Events May Dictate Easing

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The minutes of the latest RBA monthly meeting revealed that Australian monetary authorities were becoming aware of softening demand but unwilling to change policy quite yet. The minutes stated that , “Information that became available over the past month pointed to slightly softer conditions in many parts of the global economy. A month earlier, members had noted that there were some tentative signs that Chinese growth might be stabilising at a more sustainable pace. However, the most recent data had been a touch weaker, and this had been accompanied by a sharp decline in spot prices for iron ore and coking coal. If sustained, this decline would imply a larger fall in the terms of trade than the staff had earlier forecast, though the terms of trade would still remain high by historical standards.”

The RBA board was also mildly concerned about the strength of the Australian dollar noting that, “Members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected. Overall, despite the ongoing structural change, the unemployment rate had remained relatively low to date.”

In the end while acknowledging that the “global economy remained subject to significant downside risks,” the RBA concluded that, “the domestic economy appeared to be growing at around trend pace and there were signs that the effects of earlier reductions in the cash rate were still working their way through the domestic economy.” However despite RBA relatively neutral posture events may overtake Australian policymakers. The recent escalation of political tensions between China and Japan could cast a cold spell over economic growth in the region forcing the RBA to ease as early as next month. Some analysts have already predicted that the central bank would reduce rates by 50bp over the next two months as it tries to offset the slowing growth in the economy. The Aussie has remained weak in Asiana and early European trade slipping to 1.0428 and may test the 1.0400 level later in the day if risk aversion flows accelerate.

Boris Schlossberg
Managing Director

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