Wednesday, November 4, 2015

RBA holds fire, 25bps cut in 1Q16 expected - UBS

FXStreet (Córdoba) - The Reserve Bank of Australia (RBA) held the cash rate steady at a record low of 2%, and you had to look hard to find Governor Glenn Stevens' dovish tones.

Key Quotes

“After the decision, the Australian dollar rallied more than one-half percent before giving much of the gain back late in the session. The most important change in the accompanying media release was a new reference to inflation: ‘the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand’.”

“At first glance, one can be excused for thinking that this addition was an obvious one given the weaker-than-expected 3Q15 inflation report. But we see it as a seismic shift in the RBA's thinking. While other central banks worldwide have been preoccupied with fighting deflation, the RBA has been stuck in a sort of inflation-fighting mode. The quarter-percent upward revision it made to its core CPI forecast in its August Statement on Monetary Policy is clear evidence of this previous bias”.

“So what happens next? Given that the RBA held fire, we think the earliest opportunity for it to act is February 2016. The only way we could envision a rate cut in December would be if the October labour force report revealed a jump in unemployment or if business confidence plunged. In any case, it seems sensible for the RBA to wait for the US Federal Reserve December's decision on US interest rates”.

“If the Fed actually does lift off, this would add pressure on the AUD and could delay the RBA even longer. Our central case remains for a 25bps cut in 1Q16, which would take the cash rate to a new record low of 1.75%”.

“We reiterate our bearish call on the Australian dollar of 0.65 versus the US dollar over the next 12 months.”
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