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RBA slashes interest rates
Published on 05.05.2015 20:08

The Australian dollar has drifted higher today even though the Reserve Bank of Australia decided to cut Interest rates for the second time this year.

The local currency initially dropped to as low as US77.85c after the announcement before finishing the day strongly at US79.40c up from US78.38c in yesterday’s trade.

Following on from February’s rate cut, the RBA decided to slash rates again bringing the benchmark rate down to 2% and seemingly having the opposite effect of what the central bank wants which is a lower dollar.

The trigger for the spike in the Aussie dollar was the wording of RBA Governor Glen Stevens’s speech following the rate decision where he noted that,

 “Inflation outlook provided the opportunity for policy to be eased further”, and removed the easing bias from the statement which traders took as a sign that any further interest rate cuts may be a long way off or that the current easing cycle may have come to an end.

Keeping his current stance towards the Aussie dollar Mr. Stevens once again retreated that the Australian dollar by historical standards is still too high which led some to believe that further intervention from the RBA to drive the currency lower may not be completely off the table.

 

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

One analyst who predicts the RBA is not finished with their easing cycle and we will infact see a lower dollar is Capital Economics chief Australia economist Paul Dales who noted that "2 per cent won't be the floor" for interest rates.

"Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5 per cent by December," Mr Dales said.

 "That could prompt the dollar to weaken from US79¢ now to around US70¢." He added.

 

 

 


Andrew Masters

Analyst

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