Currencies 

The Australian dollar fell on Tuesday following the latest decision from the Reserve Bank of Australia. In keeping with forecasts, the Central Bank opted to leave interest rates on hold at a record low 1.50% while highlighting the positive momentum in the economy and outlook for stronger growth over the medium-to-long term. However, despite the more optimistic tone of the rate statement, there remain many headwinds that could potentially derail the economy over the coming months.

Rising unemployment, inflation that remains below target, and a mixed outlook for housing are all conspiring to challenge the outlook presented by the RBA. Furthermore, the enthusiastic GDP projections presented by the Central bank were predicated on rebounding exports of natural resources, helped in part by a weaker Australian dollar.If some or all of these developments fail to materialize over the coming months, it may set the stage for another rate cut, denting the most recent momentum higher in the Australian dollar.

More Easing Still Anticipated

RBA Governor Philip Lowe struck a very confident tone in his statement following the Central Bank’s latest decision on monetary policy. Despite the Australian economy experiencing its first quarterly contraction in years during the third quarter, Lowe eagerly dismissed this event as just a temporary setback and not a more permanent event, forecasting growth of 3.00% over the coming years Progress towards the 2.00 to 3.00% inflation target set by the Reserve Bank of Australia has been noticeable over the last few months, with headline inflation expected to reach the target range during the year.

However, even with inflation projected to return to the target range, Lowe underlined the idea that underlying inflation was not expected to rebound as quickly as the headline figure.Part of this could be attributed to the rapid recovery in energy prices over the last few months that have driven the headline figure higher.Nevertheless, this is likely to just be a transitory factor that will not be permanently felt in inflation.With unemployment fundamentals gradually worsening, expecting consumer demand to push prices higher might be short-sighted from a policy perspective.