Reserve Bank of Australia Preview: Rate reduction expected

• The Reserve Bank of Australia (RBA) is widely expected to lower the cash rate 0.25% to 1.25%
• Market focus will be on prospect for further cuts this year
• Last rate reduction was in August 2016
• The US/China trade dispute is the overriding threat to the Australian economy

The Reserve Bank of Australia will announce its decision on interest rates at 2:30 pm AEST am in Sydney, Australia, 4:30 am GMT and 12:30am EDT Tuesday June 4th

RBA: A new easing cycle

Markets are convinced that the Reserve Bank of Australia will initiate its first rate cutting cycle on Tuesday reducing the cash rate by 25 basis points to 1.25%.  It will be the first rate move by the central bank in almost three years and comes in answer to weak inflation and growth, rising unemployment and the escalating trade war between China, Australia’s largest customer and the United States, it greatest ally.

FXStreet

The rate cut has long been anticipated and is priced into the currency market with the Australian Dollar trading at 0.6956 early in the Monday session, a figure from its 18 month low.  The aussie has lost 14% against the dollar since January 2018 with its three and a half year low just two weeks ago on May 17^th.

RBA Governor Philip Lowe said recently that a rate cut would be considered at the June meeting.

How many cuts make a cycle?

With this month’s cut widely predicted and pricing indicating a second quarter–point reduction in September, and a 30% chance for a December cut, currency market reaction will depend on how aggressively the bank frames the domestic and international economies and its prospects for the raft of trade conflicts around the globe.

The RBA would have to adopt a notably looser monetary policy than markets are projecting for the Australian Dollar to fall substantially and such an admission this early in a potential cycle would be uncharacteristic.

The recent unexpected election victory of conservative Scott Morrison will likely provide fiscal stimulus as he largely campaigned on the Liberal success with the Australian economy.

Australia’s resource based economy is heavily dependent on the expansion of its huge Chinese northern neighbor.  It is no coincidence that the 28 years since Australia’s last recession are also the three decades of breakneck Chinese economic growth and rise to the globe’s second largest economy.  

The trade dispute between the United States and China is the largest impediment to the expansion of the global economy. It will weigh on Australian growth until it is resolved. 

Bloomberg

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