The World Overall

One Financial | Andrei Wogen| finance.wogen@gmail.com| 02-03-15

RBA Shifts Policy.Finally

After a year-and-a-half of neutral policy, the RBA cut their main
interest rate on Wednesday (Australia time). This was sort of inline
with expectations and sort of not. The market was split pretty much
down the middle with some expecting a rate cut and others not
while pretty much everyone expected a shift in their policy language
and tone to a more dovish tone. In the end we got both..a rate cut
and a shift in the tone of the RBA.
In their statement, the Bank sounded dovish on inflation but expect
it will be temporary as energy prices are expected to rise again. As
for growth and employment, these areas is where some of their main
concerns reside. As for the growth story, the Bank continues to see
growth residing below trend for the time being driven mostly by
lower commodity prices and a weakening employment sector. As
already mentioned too, the weakness in the employment sector was
another main concern of the RBA with this particular part of
Australias economy expected to continue to negatively effect
domestic demand. Global growth was mentioned too and the tone
there was very dismal as well. Overall then the RBA definitely and
drastically changed their tone towards the economy and their
expectations going forward during this meeting. As for the exchange
rate, this was another key part of the RBAs minutes. They continue
to view the exchange rate as being too high especially, in their view,
especially when compared to the significant declines in key
commodity prices. They view a lower exchange rate as being key to
foster balanced growth in the economy. One wonders then how
much of this rate cut was due to weakening economic fundamentals
and how much of it was due to the Bank wanting the exchange to
fall further. This line of thought would be inline with the current
currency war going on in the world right now and so is the most
likely scenario especially when looking at the fundamentals. Recent
Trimmed CPI, which is the inflation data the RBA watches, actually
gained a bit in the most recent release of the data. As for the rest of
the economy, it is weak but Im not so sure if it is weak enough for a
rate cut yet. However with the RBA continuing to expect a decline in
the economy, this move in rates could also very likely be a frontrunning move ahead of changes in the economy that they are
expecting, which is to the downside. As a side note too, I am also
expecting a continued weakening in Australias economy. All-in-all
then, considering all sides of the issue at hand, the question is
Whats next from the RBA? The RBA didnt really give much
indication on what could be next for policy but given their downbeat
expectations of growth and their continued desire to see the AUD

decline further, I am personally expecting them to continue their

now dovish stance and I also expect them to cut again, ending this
year at two percent. This expectation comes from what I expect will
be continued weakening of the global economy, especially China, a
continued desire by the RBA for the AUD to move lower and due to
what I expect will be a weakening Australian economy. The one
thing to watch though, and I expect will very likely cause concern by
Australian officials is the housing market. With even lower rates
now, the housing market will very likely continue to strengthen even
further. The one bright side of this though would be if the consumer
is benefited by this strong housing market. Though at this point,
with the housing market as strong as it is now, this transfer to the
consumer has been weak.