Reserve Bank of Australia (RBA) decided to maintain their benchmark rate at 1.75% on July 05, 2016 given the ongoing volatility in the markets post Brexit, coupled with inflation outlook. Moody’s commented that they believe fiscal consolidation would be the major policy objective for the coming government while Fitch and Standard & Poor’s cautioned investors that there is no potential in the budget for a voter-friendly spending spree. Earlier, commodity price movements were the decisive factors for interest rate differentials, but currently the AUD performance is a key decisive factor for interest rates. The AUD rose about 0.3% post the RBA’s announcement but pulled back a little almost stood stable around USD 0.7461 at the wake of the RBA decision. RBA also showed concern about the liquidity problems in financial markets that could have aroused post the Brexit vote. However, RBA has at the same time reflected that most markets more or less have continued to function effectively and funding costs for high quality borrowers seem to remain low.
Possible rate cut in August
The RBA hinted a possible 25 basis point cut in the next RBA meeting in August. Experts believe that this cut would majorly depend on the second-quarter inflation data which would be released by this month end. Retail sales have been facing challenges indicating the ongoing turmoil and in the month of May while the retail sales increased just 0.2% owing to weakness in discretionary goods and spending in states more aligned towards the mining sector considering sector’s sluggish growth. The trade deficit widened to $2.2bn on soft exports.
Cash Rate (Source: Reserve Bank of Australia)
Accordingly, RBA reported that the lower interest rates would drive the domestic demand and support the economy to withstand the ongoing Brexit impact coupled with adjustments from the exiting mining investment boom. RBA Governor, Glenn Stevens commented that the mixed indications in the labor market indicated a “modest pace of expansion in employment” in the near term. He further mentioned that recent data still shows inclination of continual growth in Australia despite a very large decline in business investment. Domestic demand and exports witness expansion around the average trend. Moreover, the chances of rate cut are more evident as the inflation has fallen under the 2-3% of the target zone and the rate cut could drive the inflation back to the growth track.
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