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Is Reserve Bank of Australia Open to Further Cutting Interest Rates?

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Reserve Bank of Australia is hinting it may cut rates again given if the country’s recession worsens, says one of Australia’s leading economists. 

 

Westpac chief economist Bill Evans says the central bank has provided clues it is considering a cut to support the country’s economic recovery.  

 

The bank said it will “continue to consider how further monetary measures could support the recover”, minutes from the RBA’s monthly board meeting also revealed changes in the wording. 

 

It is the first time since March the central bank would make potential change to its settings. 

 

The coronavirus pandemic forced the RBA to initiate emergency rate cuts to protect the economy. 

 

“This is the first time since the major policy changes in March that the board has noted the possibility of further monetary measures,” Mr. Evans said. 

 

“That could mean even more easing of the current policy stance or a new approach to policy easing.” 

 

Rates from 0.25 to 0.1 per cent would be cut by the central bank, but it would be reluctant to further push it into negative territory, Westpac said. 

 

“I do not think the RBA is even close to such a move, which would likely require intervention or negative rates,” Mr. Evan said. 

 

“That debate is more likely to emerge in 2021.” 

 

RBA governor Philip Lowe has ruled out Australia moving to a negative interest rate position, saying its measure were providing enough support. 

 

A term funding facility was introduced by the RBA that pumps cheap liquidity into the banking system. 

 

Cheaper liquidity ensures banks are able to give cheapest rates to businesses and customers looking to borrow money and further aid in the flourishing of the economy. 

 

Mr. Evans said a potential fire sale of houses and unemployment hitting the upper bounds of expectations could prompt a rethink of the settings. 

 

“The RBA may be concerned that the nascent recovery in housing will be severely impacted by a surge in distressed sellers in the housing market in 2021 once lenders insist on a resumption of payments,” he said. 

 

“Another reason why the RBA might be disposed to further stimulus is that it is forecasting that the unemployment rate is set to increase to 10 per cent by December from the current 7.5 per cent.” 

 

The Australian Dollar may experience a downward pressure due to a potential rate cut, which is trading at sustained highs above 73 US cents. 

 

As part of its additional monetary policy measures, the central bank is buying government and some large corporate bonds, which is also designed to inject more liquidity into the economy. 

 

The latest value of bought bonds is about $60 billion, with the central bank buying three-year bonds to achieve a yield target of 0.25 per cent. 

 

TECHNICAL OUTLOOK 

 

On the daily charts of AUD/USD, the price opened at 0.730 Wednesday morning in Asia and is gaining from the US dollar. 

 

Despite the RBA meeting and inflation rates to be put to the test by the bank, the bank has experience gained and currently on the 0.731 mark.  

 

The US dollar plummeted ahead of Fed meeting and the U.S. Dollar Index Futures inched down 0.03% to 93.085 by 9:76 PM ET (2:57 AM GMT) giving up some early gains. 

 

The AUD/USD pair edges up 0.12% to 0.7309 on Wednesday morning signaling a strength by the Aussie bulls. 

 

 

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