The Reserve Bank of Australia met this week and lowered interest rates to 0.10% from 0.25%. This was an expected move. It was also a widely flagged move leading up to the event by the RBA’s governor. In addition to the rate cut there was an extra $AUD 100bln of bond purchases of 5-10yr maturities for 6 months. Again, all of this was expected.
Furthermore, the RBA said that the cash rate will not be raised for the next 3 years. The RBA Board also said that it is willing to do more if necessary and is prepared to buy bonds in any quantity to keep the 3yr yield target which was lowered to 0.10%. Other key highlights of the meeting include:
- Conditions for raising cash rate are: higher inflation, rising employment and higher wages.
- RBA said recent economic data has been encouraging and near term outlook better than it was three years ago.
- Unemployment is expected to remain high but peak below 8% and sees end 2022 unemployment at around 6%. This is better than the previous forecast of unemployment peaking at 10%.
In the press conference after the rate statement Governor Lowe said that negative rates were extraordinarily unlikely, but that the RBA was still able to act to support the economy. However, Governor Lowe said that all that can be done on rates has been done now and that the focus now is on quantitative easing. This decision opens up a potential medium term divergence between the RBA and the RBNZ. The RBNZ is preparing to turn rates negative which should now support the AUDNZD pair higher. The next RBNZ meeting is on November 11, so watch that decision for any indication of the RBNX shifting away from a negative rates bias. If they do, that will invalidate the outlook.
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