Could Slow Growth Lead to a Rate Cut in Australia?

The Australian dollar declined after the country’s bank released the minutes of the past monetary policy meeting. In the meeting, the officials left interest rates unchanged and talked about the global and local economy.

According to the minutes, the officials started their discussions talking about the global economy. They said that the growth has been ‘somewhat limited’ because of the US government in US and the Lunar New Year across Asia. They also attributed the slowdown to the ongoing challenges on trade. They however noted the ongoing progress as the US continues to engage with China. This is after the US delayed the additional tariffs on Chinese goods, which were scheduled to go in place on March 1. China is important for Australia because it accounts for a third of all its exports.

The officials also discussed about the broad-based slowdown in the European Union. The bank attributed the slowdown in economic growth to the weakness in demand especially from China. Also, it blamed this on the disruption of the automotive sector after the region started to implement new standards. In Japan, the bank attributed the slowdown to natural disasters.

On Australia, the bank said that the labour market continued to improve albeit at a slower rate. The unemployment rate has dropped to 5% and is expected to continue falling. In fact, in New South Wales, the rate has fallen to 4%. The GDP growth for 2018 was slightly slower than earlier expected. This year, the bank expects the economy’s growth to be slower than earlier announced. This slowdown may be mostly because of the uncertainties on trade, the extended drought, and the falling housing prices.

The statement said that the bank will retain interest rates at the current levels. However, some in the financial markets expect that the next rate decision will be lower. This is because of the weakening economy. The statement said:

Taking account of the available information on current economic and financial conditions and how they were expected to evolve, members assessed that the current stance of monetary policy was supporting jobs growth and a gradual lift in inflation. However, members noted that significant uncertainties around the forecasts remained, with scenarios where an increase in the cash rate would be appropriate at some point and other scenarios where a decrease in the cash rate would be appropriate. The probabilities around these scenarios were more evenly balanced than they had been over the preceding year.

This month, the Australian dollar has risen against the USD. The AUD/USD pair has moved up from a low of 0.7000 and reached a high of 0.7120. This price is along the middle line of the Bollinger Bands while the Relative Strength Index (RSI) has declined to the neutral level of 50. There is a likelihood that the pair may continue moving up to test the important level of 0.7150.

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