The Australian dollar jumped after the Reserve Bank of Australia (RBA) unveiled its latest interest rate decision.
The decision by our central bankers to keep the official cash rate steady at a record low of 0.25% didn’t surprise anyone. ASX investors hardly battered an eyelid with the S&P/ASX 200 Index (Index:^AXJO) largely unmoved by the news.
The same can’t be said for the Aussie. It shot up from US71.9 cents before the RBA’s 2.30pm announcement to a two-week high of US72.1 cents.
Optimism from the RBA rate decision
I suspect currency traders were expecting more dovish commentary from the RBA to support expectations of further monetary easing.
But the board wants the federal government to do some of the heavy lifting. Its officials have said before that monetary easing alone won’t be enough to reflate the economy punctured by COVID-19.
The Morrison government will get a chance to prove it’s a team player tonight when Treasurer Josh Frydenberg hands in the budget.
Federal budget is the main event today
Economists are expecting the budget to be the most stimulatory since the Second World War as the government spends big to create jobs.
We could be left with a $200 billion budget hole in the aftermath, but it will be worth it if Frydenberg can get Australia humming at pre-coronavirus levels again in 2021.
I don’t think the RBA meant to be party-poopers, but it’s written off any V-shape recovery.
If anything, its governor Philip Lowe said the recovery will be bumpy and will take “some time” before we get back to end 2019 levels.
Glass half full
While Dr Lowe did point out other risks to growth, his statement was leaning on the cautiously optimistic side, in my view.
It started off pointing out the gradual global recovery from the pandemic and highlighted success stories like China to balance out the resurgence of the virus in other countries.
“Financial conditions remain accommodative around the world and supportive of the economic recovery,” said Dr Lowe.
“Financial market volatility is low and the prices of many assets have risen substantially despite the high level of uncertainty about the economic outlook.”
Australian dollar bulls may have also felt emboldened by the fact that he didn’t seem fussed about the rise in the Aussie.
The RBA also revealed that Authorised Deposit-Taking Institutions (ADIs) have so far drawn down $81 billion of its $200 billion Term Funding Facility and that there was ample amount of cheap credit in the system.
Don’t rule out another rate cut in November
But despite these positives, I think it’s premature to rule out another interest rate cut next month to 0.1%, which is what leading economists are increasingly forecasting.
Dr Lowe indicated as much at the end of his statement when he said “the Board continues to consider how additional monetary easing could support jobs as the economy opens up further”.
The RBA and government have to do a lot more supporting for a longer period to get us back on the path of growth.