Australian Dollar Lowers as ACB Decides Not To Cut Benchmark Interest Rate

Glenn Stevens, the Governor of Australia’s Central Bank (ACB) stated that the bank is prudent to keep the benchmark interest rate of Australia unchanged, at least for the moment. The policy makers of the country are now overseeing the impact of previous reductions made in the Australian economy. Stevens also added that a significant easing policy is already in place, but the effects of the same are still not visible. Stevens commented that the latest inflation data is not much of a bothering to him, at least for now. But, the fact that it is on the higher side cannot be ignored either. The current condition of global economy also forces the bank to sit still for the moment.

Incidentally, the overnight cash rate target of the country was reduced by 1.5 percentage points in 5 moves starting from November, 2011 to October, 2012 by The Reserve Bank of Australia. Currently, it is at 3.25 percentage. The Australian economy is currently transitioning from an investment stage to higher exports and it expects the non-mining industries to take up some of the slack in Australian economy. According to Stevens, the mining boom that the country has seen is overwhelming and even though the global economy continues to pressure, the industry is still doing more or less good. He believes that Australia should adapt to the slower pace of growth in China. This will ensure higher national savings at home. Stevens clearly stated that he doesn’t believe that China’s economic slowdown is much significant and in future, the economy of this Asian powerhouse will look more flourishing. When he was asked to air his views on US economy, he commented that the housing market of US has turned finally, thereby helping the slow healing of the country’s economy.

The Australian Dollar is down by 0.23% against USD currently and is priced at 1.0387 per USD. It is priced at 0.65224 per GBP and 0.81036 per Euro. The 10-year yields have risen by 7 basis points for Australia, on the other hand. This is the biggest gain for the yield since 18th October. Incidentally, this yield was at a record low of 2.7% last June and since then has rebounded well. Among developed markets, Australian bonds actually saw the highest volatility.

Stevens also acknowledged that AUD is currently experiencing a high and it will get down eventually. People may start complaining about the same when that happens, but the families should go with a more prudent approach now to avoid problems in future. He also stated that the possible decision of International Monetary Fund to reclassify Australian Dollar as a reserve currency may not have a huge impact on the Australian economy, apart from a few temporary surges that AUD may see. Incidentally, AUD has seen a jump of 3.9% this year making it the biggest gainer after New Zealand Dollar in the strongest group of 10 currencies.

According to analysts, the AUD exchange rate may have some significant contribution in helping the need of a re-balancing. For maintaining the low inflation, in case, the exchange rate gets lower, the pace of domestic unit costs should get lower than what is has been in the last 5 years.

According to many traders, The Reserve Bank of Australia will go for another round of key rate cut in December. Stevens himself didn’t rule out such a move and confirmed that if in future required, further easing will definitely be implemented.