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2 Mar 2015
RBA to adopt a clear easing bias - Westpac
FXStreet (Barcelona) - Bill Evans, Chief Economist at Westpac, explains that RBA failing to cut rates or adopt an easing bias might put further upward pressure on AUD, and with the Aussie currently trading above the central bank’s desired 0.75 level, a rate cut is likely in March.
Key Quotes
“The Governor pointed out in December that he saw the AUD needing to fall to USD 0.75. Our own estimate of fair value puts the AUD at around that level.”
“Prior to the rate cut in February the AUD was trading around USD0.78. Immediately following the cut the AUD traded down to USD0.765 although that level proved to be unsustainable in the near term. That was probably because the Governor gave no guidance in his statement, leaving the market with the perception of a neutral bias.”
“Since then the AUD recently traded around USD 0.79 and is currently around USD0.785. Markets are currently pricing a rate cut .. with a probability of 50% so no move will probably further boost the AUD.”
“My view is that the better approach is for the Governor to assess that he still has ample scope to cut further. Certainly from the perspective of the response of businesses and households to the historically low rates in 2014 and the 'negative to zero' policy rates in other countries there is no justification for a 2% 'floor'.”
“The policy approach to ensure maximum easing in financial conditions would be to cut rates by 25bps and adopt an explicit easing bias. That bias might not need to be acted on but such a policy would ensure maximum downward pressure on the AUD.”
“We recognise that anticipating the month to month preferences of the Governor and the Board are fraught with danger. What we can be absolutely certain of is that the cash rate will be reduced by 25bps by May this year.”
“That said, the best policy is to cut by 25bps in March and adopt a clear easing bias.”
Key Quotes
“The Governor pointed out in December that he saw the AUD needing to fall to USD 0.75. Our own estimate of fair value puts the AUD at around that level.”
“Prior to the rate cut in February the AUD was trading around USD0.78. Immediately following the cut the AUD traded down to USD0.765 although that level proved to be unsustainable in the near term. That was probably because the Governor gave no guidance in his statement, leaving the market with the perception of a neutral bias.”
“Since then the AUD recently traded around USD 0.79 and is currently around USD0.785. Markets are currently pricing a rate cut .. with a probability of 50% so no move will probably further boost the AUD.”
“My view is that the better approach is for the Governor to assess that he still has ample scope to cut further. Certainly from the perspective of the response of businesses and households to the historically low rates in 2014 and the 'negative to zero' policy rates in other countries there is no justification for a 2% 'floor'.”
“The policy approach to ensure maximum easing in financial conditions would be to cut rates by 25bps and adopt an explicit easing bias. That bias might not need to be acted on but such a policy would ensure maximum downward pressure on the AUD.”
“We recognise that anticipating the month to month preferences of the Governor and the Board are fraught with danger. What we can be absolutely certain of is that the cash rate will be reduced by 25bps by May this year.”
“That said, the best policy is to cut by 25bps in March and adopt a clear easing bias.”