Will the RBA cut interest rates?
Everyone else has an opinion on interests rates so here is mine.
CPI rose 1% for the quarter and 3.6% over twelves months to the march quarter, with most forecasting the RBA will keep rates on hold, when it next meets in 2-weeks time. Unemployment is holding steady at 3.8%, but does look like it will only go higher from here. Traditionally the unemployment rate has been at or round 5%. If this holds true then there is still more job losses to come.
For me from here the RBA cannot cut the cash rate and it has nothing to do with inflation. It’s about the FX rate now. The US economy is holding steady and inflation still remains above the FED’s target to cut rates and it’s looking like they will not cut at all in CY2024. This has caused the greenback (US$) to strengthen against the AU$.
Image Source: Yahoo Finance
The AU$ currently will get you US$0.65. This is great news for out exporters miners, agriculture, energy etc. But given we import most of our goods and materials this is not great news for consumers or households as the cost of our goods and materials will go up as the AU$ weakens. The biggest price increases will most likely be seen in petrol, construction materials, heavy machinery, fertilisers etc.
The reason the AU$ weakens is as follows. When the cash rate is cut more dollars are injected into the economy and given our $ is floated on the FX market. This means there are more dollars in circulation and the AU$ falls, and you properly guessed it, when rates are hiked the opposite occurs. So if the RBA cuts rates and the US$ remains strong or they increase rates (unlikely at this stage but not completely off the table) the AU$ will fall further and the cost of our goods and materials will go up, causing inflation.
So from here all eyes are on the US$. If there is a weakening of the US$ then a rate cut could be on the table here, but if the US$ remains at current levels or strengthens. Then the RBA has no choice but to keep rates on hold. Worst case is the AU$ falls and the RBA has to increase rates to support the AU$.
In my last economic update at the start of the year I did write I was not expecting a rate cut this year from the RBA, link here.
P.S. After adding Beach Energy (ASX:BPT) to the watchlist I have purchased shares in them and they are now in the portfolio.
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2 comments
No cash rate cut today in my view. Think the RBA will keep rates on hold and will be more hawkish in their commentary leaving the door open for future rate hikes.
I understand that the RBA kept rates unchanged.
I think that both the RBA and the BOE will keep at least one eye on the US Fed rate decisions and take them into account in setting their own rates.
Nevertheless with CPI at 3.6% and 3.2% respectively I think that in both cases it would be premature to cut rates.
Inflation is rather sticky in the US and I think that the Fed are not helped by Joe Biden's deficit spending. I think the current status quo could well be in place at least until the Autumn in respect of all three central banks.
The one current exception seems to be the Eurozone with CPI inflation at only 2.4% there seems to be a distinct possibility of a rate cut in June assuming there are no bad inflation figures this month.
As you say the current US dollar strength does help Australian miners and that also applies to British miners ; but ordinary consumers in both countries will continue to struggle.