Summary:
- Australian central bank pledges to reassess the economic outlook when it meets next year
- It admits the past three rate cuts have been working through the usual channels
- Lowe suggests 0.25% is the effective lower bound for rates in Australia
- Aussie could be prone to ‘a sell rallies’ approach
The Reserve Bank of Australian plans to reassess the economic outlook when it meets in February 2020 in order to decide whether further conventional monetary policy easing is required, the December’ minutes suggested. Although the Antipodean central bank still stuck to its view that the past three rate cuts have been working through the usual channels, it added that monetary policy has long and variable lags, therefore there will be a need to make a comprehensive analysis at the beginning of the next year. The bank also signalled that due to a high level of consumers’ indebtedness it may take more time before they boost spending in response to lower mortgage payments.
Let us also recall that according to RBA Governor Philip Lowe the effective lower bound for rates in Australia is at 0.25%, meaning two 25 bps rate reductions are possible before hittis this level. There is also clear the RBA will focus on conventional policy at first before switching to an unorthodox approach once it runs out of ammunition. Nonetheless, Philip Lowe claims it is rather unlikely the central bank may have to resort to such unconventional policy like asset purchases. Taking into account current circumstances there it seems that the RBA is unlikely to reach its inflation aim in the foreseeable future, that would increase calls for further conventional policy easing or even QE-like programs. Market participants are currently ascribing 60% odds for a rate cut in February, and given that we think that ‘a sell rallies approach’ could be used by that time.
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The Aussie seems to have hit the glass ceiling at around 0.6940. Source: xStation5
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