Australian dollar nears decade-low after Reserve Bank justifies interest rate cut - ABC

JUNE 18, 2019

By senior business correspondent Peter Ryan

The Australian dollar has fallen to its lowest level in around a decade as investors anticipate further interest rate cuts from the Reserve Bank in the next few months.

Key points:

  • The Australian dollar fell on the minutes to 68.42 US cents by midday (AEST)
  • That is just above its low of 68.24 US cents on January 15, 2016 — the previous low before that was in March 2009
  • The RBA has flagged the likelihood of further interest rate cuts, despite acknowledging negative effects for depositors

By 12:00pm (AEST), the local currency had fallen 0.2 per cent to 68.42 US cents, following the RBA's release of its June meeting minutes.

That is the lowest level since January 2016, and you have to go all the way back to the aftermath of the global financial crisis in March 2009 to find an even lower level.

The minutes revealed Australia's central bankers thought it was "more likely than not" that it would be appropriate for the cash rate to fall in the period ahead.

However, the board recognised that lower interest rates are not the only monetary policy lever.

It also said that other options might assist in lowering the rate of unemployment towards 4.5 percent, the level which the RBA regards as full employment.

Late last year, RBA deputy governor Guy Debelle has flagged the option of quantitative easing — or metaphorical money printing — to help stimulate the economy through bond buying and asset purchases, used by major global central banks during the global financial crisis.

What is quantitative easing?

What is quantitative easing?

The minutes reiterated previous public statements that the RBA is now focussed on lowering the jobless rate given it is "apparent that the labour market still had significant spare capacity".

Depositors feel rate pain

The minutes also revealed that impact of lower interest rates on depositors — in particular older Australians — was a key consideration in the RBA's decision to slash the cash rate to a record low earlier this month.

The "implications of lower interest rates on household incomes" was discussed at length, and "changes in interest rates can have different effects on different groups of households", according to the RBA's minutes of its June meeting.

"Members recognised that many older Australians rely on interest income which would decline with lower rates," the RBA said.

However, board members opted to cut the cash rate to 1.25 per cent to help lower the unemployment rate after "carefully considering" the impact on people relying on interest from bank deposits.

RBA cash rate explained

RBA cash rate explained

The argument in favour of cutting rates was based on the outlook for a lower Australian dollar, reduced borrowing rates for business, and lower interest payments for households which would free up cash for other spending.

Since the RBA's decision to cut rates, banks have passed on either all or most of the reduction to borrowers — while also reducing deposit rates to the disappointment of older Australians who rely on the income stream.

The RBA board also discussed the risks of lower interest rates, especially given the current high levels of household debt.

"Members judged a decline in interest rates was unlikely to encourage a material pickup in borrowing by households that would add to medium term risks in the economy," the minutes said.

The board also noted the trade dispute between the United States and China had "intensified the downside risk posed to the global economic outlook".


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