Falling dollar complements rate cut

Falling dollar complements rate cut

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The Reserve Bank (RBA) has released its monthly statement on monetary policy, following last Tuesday’s 0.25 per cent rate cut.

HSBC chief economist (Australia and New Zealand) Paul Bloxham said the statement was understandably downbeat and emphasised the role of a lower Australian dollar in supporting the rebalancing of Australia’s growth.

Mr Bloxham said it was “very clear from the statement that the RBA sees the recent move in the Australian dollar, and where it moves next, as a critical part of the current growth and inflation outlook”.

“As we have said for some time now, the cash rate and Australian dollar outlooks are intertwined,” he added.

Despite the recent cut and the lower dollar, the RBA downgraded its growth forecasts for this year to 2.25 per cent, down from 2.5 per cent in May.

The statement implies that with growth ‘below trend’ and inflation well contained, there is some room for a further reduction in the cash rate.

“That said, they do expect the current policy settings to be sufficient to see around trend and on-target inflation by the end of 2014 – so the option of doing nothing further would see a return to trend conditions,” Mr Bloxham said.

The RBA expects the unemployment rate to continue its recent upward trend over the next few quarters, but to then stabilise before starting to decline towards the end of the forecast horizon.

“While the RBA has room to cut further, we still expect that they may not need to, as the dollar may do much of the work for them,” he said.

A further cut to the cash rate is not expected to come next month, with the federal election now set for 7 September 2013.

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