Finance Finance News Stronger Australian dollar increases chance of February rate cut

Stronger Australian dollar increases chance of February rate cut

RBA Governor Philip Lowe is expected to cut rates again sometime in 2020. Photo: TND
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Another rate cut is looking more likely after a reprieve in the US-China trade war saw the Australian dollar climb above 70 US cents.

The jury’s still out on whether the Reserve Bank will drop interest rates to a new record low of 0.5 per cent next month.

But a stronger Australian dollar has increased the likelihood of another cut, as lower interest rates would depreciate the dollar and boost the competitiveness of Australian exports.

Australia’s export sector was the one bright light in the economy last year, and so a persistently strong Australian dollar would make it even less likely for growth to pick up in 2020.

As of the time of writing, the Aussie was trading at 69.81 US cents.

That’s below the five-month high it reached on New Year’s Eve (70.32 US cents), but high enough to turn heads at the Reserve Bank.

“It’s still within a trading range of the last few months, but if it was to break much higher, then it would filter into [the RBA’s] discussions about the growth outlook being constrained,” said independent economist Stephen Koukoulas.

“It’s moved into the edge of the screen, if you like, in terms of something to keep an eye on, because I think it would have surprised quite a few people to get back above 70, when two or three months ago we were at 67 and 68 and some people were forecasting a fall to 65 or less.”

Mr Koukoulas said economic growth would suffer if the dollar were to consolidate above 70 cents.

But he told The New Daily movements in the consumer price index and unemployment rate would have a bigger impact on the Reserve Bank’s decision-making.

And independent economist Saul Eslake offered a similar take – telling The New Daily a strengthened Aussie dollar increased the likelihood of February rate cut “at the margins”.

“We’re talking about movement of a cent or less, so I don’t want to overstate the role the currency plays,” Mr Eslake said.

“But, certainly, the Reserve Bank would regard a sustained appreciation of the currency as unhelpful to its objectives of pushing inflation back to the target band of 2-3 per cent, boosting growth to its trend rate, and getting unemployment down towards its estimate of the full employment rate of 4.75 per cent.”

Commodity prices are high enough for the mining sector to withstand a stronger Australian dollar, Mr Eslake added.

But a strong Aussie would hit drought-stricken farmers much harder, as agricultural commodity prices aren’t particularly high at the moment.

The stock market is currently indicating a 42 per cent probability of another 25-basis point rate cut in February.

The official cash rate currently sits at 0.75 per cent, after the Reserve Bank cut rates in June, July and October.

Net exports and government spending carried the economy in the fourth quarter.

RBA Governor Philip Lowe hoped last year’s rate cuts would stimulate the economy by encouraging home owners to loosen their purse strings.

But record high debt levels and stagnant wages meant consumers kept their wallets firmly shut, with consumer spending growth in the September quarter dropping to its weakest level since the global financial crisis.

Dr Lowe has said he is prepared to cut rates even further.

But he’s also urged the government to pass productivity-enhancing reforms and spend more on infrastructure – warning that cheap money alone won’t kickstart the ailing economy.

Most economists believe that Dr Lowe is right to call for more government spending – not only because consumers aren’t spending, but also because businesses aren’t investing.

As NAB’s chief economist Alan Oster recently put it: “It’s not a recession, but it will feel pretty much like a recession for large chunks of the private sector.”

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