Aussie dollar holds the key to further interest rate cuts

Fluctuations in the Aussie dollar hold the key to further interest rates, according to leading economists.

The Reserve Bank board at its August meeting cut the cash rate to 2.5% and is leaving open the possibility of further cuts.

The minutes of the RBA meeting released yesterday indicated it will ‘’continue to examine data over the months ahead to judge whether its monetary policy is appropriately configured’.

It may be hoping the weakening dollar may do its work instead, and stimulate the economy by helping industries that have been struggling, such as tourism, manufacturing and the retail sector.  

HSBC’s Paul Bloxham, chief economist Australia and New Zealand, says ‘’while the RBA has room to cut further, we still expect that they may not need to.

‘’Lower rates should gain further traction in the economy and the lower Aussie is also expected to help support growth.’’

New Limited’s Terry McCrann says the board is worried about a ‘’property bubble’’ and that the only stimulus that would come from even lower rates ‘’is to the second-hand property market and the bank accounts of real estate agents’’.

But he says the RBA ‘’is hostage’’ to what the US Federal Reserve does which will impact the US dollar and, indirectly, the Aussie. The right moves would see our dollar slide to the 80s ‘’and hopefully stay there’’.

He says that would rule out any further rate cuts.

Paul Bloxham and HSBC colleague Adam Richardson agree, saying the board has made it clear that moves in the Aussie are a critical part in policy setting, but that a further decline in the dollar is 'possible' and that it would help rebalance Australia’s economic growth, as the mining investment boom ends.

‘’ In our view, this month's rate cut may be the last for this easing cycle. Low policy rates are expected to gain further traction in the domestic economy, with the boost already provided to the housing market spreading to the broader economy in coming months.

‘’The election on September 7 should help this process, as it should help to remove uncertainty for businesses about the regulatory environment.

‘’The Aussie should also begin to provide support for key sectors of the Australian economy, given its fall in recent months, although the lower dollar will lift inflation.

‘’However, a rising dollar is a risk to the view that the easing phase of the rates cycle may be done.

‘’In our view, this month's rate cut may be the last for this easing cycle, though this relies on our forecast that the Aussie will edge lower, rather than higher, over coming quarters.’’

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