The Reserve Bank of Australia (RBA) might have to cut interest rates before the year ends, said Peter Esho, chief market analyst for Invast.
Esho shared his thoughts following the recent release of benign inflation data.
With the current strong performance of the Australian dollar, Esho said that any move above US$0.73 would be a selling point. This is due to the likelihood of lower official rates expected later this year, which would force the Australian dollar to drop.
The latest data from the Australian Bureau of Statistics indicated that the Consumer Price Index rose 0.5% over the third quarter of 2015, a 1.5% improvement from last year. The data was under the RBA’s core inflation target band of 2% to 3%, suggesting sluggish economic growth for the country.
"The CPI read confirms that inflation is not only a secondary issue to growth, but also an opportunity to further stimulate demand in the economy. The RBA now has data on its side, and there is real downside risk to economic growth - and jobs - if it doesn't move to cut interest rates,” Esho commented.
"The lower currency has not caused any foreseeable inflationary pressures, which means the RBA can push further in jawboning. With China having rate cuts on the weekend, the door for the RBA is now well and truly open for more cuts, to drive down the currency, without worrying about runaway house prices.”
Esho further stated that if the Aussie dollar does move to the US$.70 range—where there is resistance—the RBA will have to intervene and go another 25 basis points.
“They need to maintain an element of surprise and even though the recent minutes didn’t indicate an imminent cut, a November cut is probably a higher chance than what the market is signally and I would be a seller of the Aussie dollar anywhere above the US73 cent range,” he remarked.
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