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Australian dollar may suffer on rate cut

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As widely expected, the Reserve Bank of Australia in their latest announcement earlier today decided to keep interest rates on hold at 1.5 percent and according to some analysts, we can expect the same result for some time with even the possibility of a rate cut not out of the question.

In the following monetary statement after the rate decision, the RBA offered a better than expected forecast of the Australian economy and especially with regards to the jobs market.

They noted that the unemployment rate remains low and is expected to decrease even further as time goes by

“The outlook for the labour market remains positive. The unemployment rate is trending lower and, at 5.3 per cent, is the lowest in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 percent” noted RBA governor Philip Lowe

“Wages growth remains low, although it has picked up a little. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process” he added.

Some say however that the RBA should forget the jobs market and be more concerned on the property market especially in light of the upcoming royal commission, which is expected to cause immense tightening in lending standards.

This will inflict more pain on an already battered property market with further losses of up to 15 percent possible.

“It’s a significant risk given the difficulty in gauging how severe the tightening in bank lending standards in the face of the royal commission will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1-2 per cent,” noted AMP Capital chief economist Dr Shane Oliver.

Mr. Oliver is also one of the few analysts who predict that a further rate cut may be needed to shore up the economy and put the real estate sector back on track.

“Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so we still can’t rule out the next move in rates being a cut rather than a hike,” he said.