RBA jawboning the AUD, again: HSBC's Paul Bloxham

GUEST OBSERVER

The RBA held its cash rate steady at 2.00 percent, as expected, and maintained an easing bias. The biggest change to the post-meeting statement was an added paragraph noting concerns about the recent appreciation of the AUD.

The RBA stated that 'under present circumstances, an appreciating currency could complicate the adjustment under way in the economy'.

It is clear that the RBA believe that a rising currency is unhelpful, as it could slow the pace of rebalancing, particularly towards the tourism and education sectors, which are exchange-rate sensitive. We stick by our view that a further cash rate cut will be needed. On timing, our central case is for a cut before end-Q2, but we see this as 50:50, given the upcoming budget timing and the possibility of an early election.

Facts

- The cash rate was held steady today at 2.00 percent, as expected (all 26 economists in the Bloomberg survey expected a hold decision).The market was pricing a 5 percent chance of a cut just prior to the announcement.

Implications

Today's post-meeting statement appears to have shifted the RBA back into AUD 'jawboning' mode. Although the statement made no reference to an appropriate level for the currency, it relayed the RBA's concern about the recent rise in the currency.

Whereas the previous statement had noted that 'the exchange rate had been adjusting to the evolving economic outlook', today the RBA said that, although the appreciation 'in part, reflects some increase in commodity prices, monetary developments elsewhere in the world have also played a role'.

The first point of interest is that the RBA acknowledges that the rise in the currency is not just in line with commodity prices. The second point is the reference to monetary developments elsewhere in the world, which suggests that the RBA may be becoming increasingly concerned about the dovish stance of the Federal Reserve and of the negative rate settings in Europe and Japan.

The challenge for the RBA remains that global inflation and interest rates are low, which is putting upward pressure on the AUD at a time when Australia needs a more competitive currency to assist with rebalancing growth at the end of the mining boom. As they noted today, 'under present circumstances, an appreciating currency could complicate the adjustment under way in the economy'.

Their use of the words 'under present circumstances', implies that the currency is an increasingly important driver of growth as Australia's economy shifts to being more driven by services exports, such as tourism and education exports.

Although the RBA has considerable reluctance about the idea of cutting its cash rate further, it may yet have to cut, in order to keep the currency competitive.

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.