Discernible in last night’s statement from the RBA announcing unchanged policy was a sense of underlying comfort with the current situation down under. On global growth, the RBA expects a below-trend pace in 2012, although not a deep downturn. In particular, Chinese growth is moderating, but remains robust, whilst America is enjoying a moderate expansion. Domestically, growth is around trend, while underlying inflation is in the middle of the RBA’s 2-3% target band. Australia’s central bank remains acutely conscious of the significant structural change occurring in the economy, with investment in the mining sector still very strong while domestic consumption is weak. The latter is weighing heavily on both house prices and employment.
Looking ahead, the RBA clearly still has a bias towards easing. Although content to wait and see for now “should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy”. Our view is that demand will remain tentative over coming months, helping to ease inflationary pressures further. As such, we would be very surprised if official rates were not reduced again before mid-year.
Although the Aussie suffered overnight, it had little to do with the RBA’s decision to keep rates unchanged. After reaching 1.08 last Thursday, the AUD has been on the slide with some acute selling evident again overnight. The tone towards the Australian currency was not helped by some sabre-rattling from Israeli President Netanyahu and a suggestion from a PBOC adviser that the renminbi would probably not be allowed to appreciate much further for a while.
Suddenly, the Aussie is looking more vulnerable.