Comments from HSBC analyst Paul Bloxham on the Reserve Bank of Australia and the Australian dollar
- Persistently low inflation is creating a headache for the Reserve Bank of Australia
- Especially given that it is reluctant to make further cuts to interest rates
- Growth is finally lifting
- Australian economy rebalances away from mining
- Extended period of below-trend growth (3 years) following the mining boom is weighing on local inflation
- Unemployment rate is well above its full employment level of around five to 5.25%
- The challenge for the RBA is that inflation has fallen too close to the bottom end of its two to three per cent target band, and more growth may be needed to keep it on target
- However, with interest rates already at record lows and having boosted asset prices significantly, the RBA is concerned that further cuts could threaten financial stability.
- An alternative strategy may be to encourage the Australian dollar lower
HSBC has predicted a 25 basis point cut to the official cash rate in the first half of 2016
- However, there is significant uncertainty about this
- The Australian government has scope to support growth with fiscal policy although, so far, it has been unwilling to consider this as an option
(bolding emphasis is mine)
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h/t to Livesquawk for the Bloxham comments
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I wouldn't be placing too much emphasis on low inflation as a factor which may prompt RBA action. At least in the near term. The RBA is in 'wait and see' mode and are very much on hold. They have been since May of 2015.
