- AUD gains after the RBA left monetary policy unchanged
- OCR to decline to 1.75% in the third quarter
- AUD/USD to decline to 0.72 by the end of 2015
AUD gains after the RBA left monetary policy unchanged
The Australian dollar (AUD) surged by 90 pips to above 0.7690 after the Reserve Bank of Australia (RBA) surprised financial markets by leaving the official cash rate (OCR) unchanged at 2.25%. The RBA outlook on the economy is largely unchanged. The economy is expected to operate with a degree of spare capacity for some time and growth in labor costs to remain subdued. Inflation is expected to remain consistent with the target over the next one to two years even with a lower exchange rate. We think that there are several reasons why the RBA decided to keep the OCR unchanged today. First, they are awaiting for further progress on their study to contain risks in the housing market. Second, the AUD trade weighted index has recently declined. Third, they are awaiting further evidence on the inflation picture (Q1 CPI on 22 April) and last but not least China’s Q1 GDP print on 15 April.
RBA to cut interest rates by 25bp each in May and in Q3
We expect the RBA to lower the OCR by 25bp to 2% in May followed by another 25bp easing to 1.75% in the third quarter of this year. Failure to do so will result in a stronger than desired AUD and slower pace of rebalancing the economy. Furthermore a recent RBA study has shown that the impact of high house prices on the financial system is likely to be limited. Non-performing loan share of banks’ housing loans has declined from 0.9% in 2011 to 0.6% in December 2014. The share of loan approvals with loan to valuation ratios above 90% is also on a downward trend. Furthermore, the Australian Prudential Regulation Authority is also reviewing interest only lending practices as authorities seek to curb speculative activities and leverage in the housing market.
AUD/USD to decline to 0.72 by end 2015
We think that any short term gains above 0.77 is unlikely to be sustainable. We expect the AUD/USD to decline towards 0.72 by the end of this year.