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Why the US cash rate reduction could force Australia’s hand
The Federal Reserve’s cutting of its funds rate for the third time in three months has undermined Australian central bank efforts to reduce the price of the Australian dollar.
Why the US cash rate reduction could force Australia’s hand
The Federal Reserve’s cutting of its funds rate for the third time in three months has undermined Australian central bank efforts to reduce the price of the Australian dollar.
The US Federal Reserve (the Fed) announced its reduction of its own rates by a further 25 basis points to a range of 1.5 to 1.75 per cent.
AMP Capital’s chief economist Shane Oliver said the Fed’s rate cuts are targeted at reducing the risk of a trade war, but could have a negative flow-on impact on the Australian economy.
“The Fed’s further easing along with stimulus elsewhere globally should help support global growth, which is good for Australia, [but] a concern for the RBA is that with the Fed easing, the interest rate gap between Australia and the US looks like it might be bottoming,” he said.
This has led to an increase in the Australian dollar, which moved up more than 3 per cent from its recent low following news out of the states of the cash rate reduction.
While this does make imports cheaper for domestic consumers, it also increases the cost of exports, which can have an impact on trade.
Reflecting on the global environment, Mr Oliver said he expects the Reserve Bank of Australia to follow the Fed and further ease monetary policy.
“[This] is another reason to expect further RBA monetary easing, despite recent signs that the RBA is not in a rush to ease despite another low inflation reading for the September quarter,” he said.
The chief economist believes the upcoming US presidential election could end the trade war, which would help ease the pressure on Australia to react.
Mr Oliver said it is likely that the Fed is “at or close to the bottom on rates”, adding that the recent “trade truce” between the US and China has a greater chance of success, given President Donald Trump’s desire to keep the US economy strong ahead of the 2020 presidential election.
As rates continue to fall, RBA governor Philip Lowe has reminded Australians to take advantage of the current record-low interest rates.
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