Key support comes at the 0.7500 area is liable to be under threat if the RBA cuts rates.
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The latest inflation data from Australia showed the world’s 12th-largest economy has slipped into deflation for the first time in seven years.
The Australian dollar has faltered as investors gear up for a Reserve Bank interest rate call.
The data showed headline consumer prices fell 0.2% in the first quarter.
Whether the bank cuts rates or not, most in markets expected that the board will leave its easing bias in place, or strengthen it, when the statement is released this afternoon.
The fact that the Federal Government is set to hand down the federal budget tonight has been cited by many as key reason why the RBA will keep the cash rate on hold.
The RBA has consistently said continuing low inflation would allow for a cut in its cash rate, but Commonwealth Bank economist Savanth Sebastian thinks the central bank won’t react so hastily given solid economic activity and unemployment figures. While officially independent, the RBA has two monetary policy meetings scheduled before the July poll, potentially threatening to disrupt the Turnbull government’s campaign on its economic credentials.
As far as potential rate changes for the months ahead are concerned, 55% thought a rate cut would occur before 2016 is out. Consumer prices rose by just 0.2 percent in the first three months of 2016 after declining by 0.5 percent in the previous quarter, on the back of falling fuel costs. The RBA has long placed its central focus on inflation targeting, with a watchful eye to ensuring financial stability.
Measures of underlying inflation fell to their lowest level on record, which is about 1.5 per cent. This is below the Reserve Bank’s inflation target and opens up the possibility for a deflation outbreak, which could create a huge problem for the economy. According to FactSet, economists had been expecting a 0.2% rise.
What’s equally interesting to the cut debate this month will be signals about further interest rate moves.
“There’s a raised expectation that the Australians will cut rates tomorrow”. Even if your provider gives you a rate cut, the savings made on an average home loan won’t be anywhere near what you could get by switching to one of the best deals in the market.
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“Provided that inflation expectations converge quickly towards the 2 percent inflation target-through aggressive monetary easing and effective forward guidance-such a policy package has substantial benefits by overcoming the deflationary effects of aging, while supporting growth and fiscal sustainability”, they state.
