Australian dollar headed for a fall as Reserve Bank mulls interest rates cut

Mobirise

Source: ABC News | Dowununder Radio | admin@downunderradio.com.au

To cut, or not to cut? That is the question.

After years of coasting along on the back of outrageous fortune, Reserve Bank princeling Philip Lowe, as another famous plutocrat once observed, may just be forced tomorrow to take up arms against a sea of economic troubles.

Right now, there's an even money bet as to whether the Reserve Bank will shave another quarter of a percentage point off the official cash rate. Ultimately, the debate is not about if, but when.

If it doesn't move tomorrow, it most likely will be next month. And there will be at least two within the next few months.

Two unrelated factors will be weighing on the governor's mind at tomorrow's meeting.

One is the upcoming election and the potential political fallout from a rate cut in the final days of the campaign.

The other potentially more significant factor is that the US Federal Reserve chief Jerome Powell may just have delivered Mr Lowe some breathing space.

Mobirise
Mobirise

By thumbing his nose last week at US President Donald Trump's demands to cut American interest rates, the American central bank boss has put our currency under pressure.

On Friday, the Aussie battler spent most of the day below US70c, a situation that would have delighted the boffins down at the Reserve Bank. For their entire focus now will be on undercutting the currency in an effort to boost growth and inflation. And the best way to do that is through slashing rates.

The case for a cut
The long, grinding downturn in our housing market finally has begun to bite. Last week, both the ANZ Banking Group and NAB highlighted a small but significant uptick in the number of homeowners having trouble repaying mortgages.

According to ANZ's numbers, almost 5 per cent of households now have slipped into what's known as negative equity. That's when you owe more on the house than it's worth.

It's a situation that can become serious if unemployment rises. Not only do defaulting borrowers lose their home, they still end up with debt. And losses start mounting in the banking sector, ultimately putting the economy further under strain.

That's also starting to impact spending. On Friday, the Federal Chamber of Automotive Industries reported an 8.1 per cent drop in new car sales in April compared with a year earlier while MotorCycle Holdings told the stock exchange the motorcycle market had shrunk 14.6 per cent in the first three months this year.

Add in an inflation reading of zero in the March quarter and a plunge in annual GDP to just 2.3 per cent, and there are some pretty compelling reasons to cut interest rates right now.

Waiting for unemployment to deteriorate, as some suggest the RBA should, would be leaving things too late.

Would a rate cut stop the housing rout?
It may slow the decline but it won't halt it.

Demand is being crimped by the sudden introduction of responsible lending. On the other side of the equation, supply is about to explode with several hundred thousand new apartments about to hit the market.

Those two factors combined can only mean one thing; further falls in housing prices.

So, why bother with a rate cut?
NAB's interim boss Phil Chronican last week forcefully argued there was little to gain from another cut to interest rates.

"Monetary policy has a lot of potency when it's at high levels … when they are at low levels, it just doesn't have the same effect," he said.