Traders and economists are the most united they have been this year Reserve Bank of Australia (RBA) Governor Glenn Stevens needs to cut rates today in the face of a stronger currency.
The market is pricing in a better than 75 percent chance borrowing costs will fall to a fresh record of 2 percent, and 25 of 29 economists also predicted a quarter-point reduction.
Galvanizing the forecasts is a rebounding currency hovering at US$0.78 and a stalled recovery in the price for iron ore that underpins export earnings.
Policymakers also face the risk that firms outside of mining that were supposed to pick up the slack in the economy will actually reduce investment in an economy growing below its potential.
“The recent surge in the Australian dollar would be viewed quite dimly by the folks at the Reserve Bank,” Westpac Banking Corp chief economist Bill Evans said.
Failing to cut rates “in the face of such strong market pricing will affect the bank’s credibility over time,” he added.
Today’s decision also dovetails with the release of the RBA’s updated quarterly forecasts this week, which the board will see at the policy meeting, but which will not be released publicly until Friday.
In February, when Stevens cut the cash rate for the first time in 18 months, he cited the downgrade in growth forecasts in that month’s statement on monetary policy.
The RBA has shown a preference for moving in the same month that it releases quarterly forecasts, Evans said.
The last three cuts dovetailed with such updates and the same is true for more than half the moves made since Stevens became governor in September 2006, data compiled by Bloomberg show.
Australia’s central bank also prefers to see the latest consumer price readings before moving. Core inflation remains at the lower end of the RBA’s 2 percent to 3 percent annual target and the consumer price index rose closer to 1 percent on a year-on-year basis, data last month showed.
The Australian dollar has jumped more than 3 percent since the RBA’s April 7 policy meeting, when it wrong-footed market rate-cut expectations and was the best performing major currency outside the Norwegian krone and Brazilian real over the same period.
Government data last month showed the unemployment rate unexpectedly fell to 6.1 percent, as the economy added 37,700 jobs in March, more than double the number of positions predicted by economists.
The RBA is trying to encourage growth in services, manufacturing and retailing to offset the decline in mining investment that helped drive the past decade of Australia’s 24 years of growth. It has had to cut rates to offset a currency that has been propped up by funds seeking higher yields as counterparts in Europe, Japan and the US pursue quantitative easing.
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