Australian Dollar Forecast Lower as Two Rate Cuts for 2016 are Forecast by ANZ

Australia's central bank will be looking for excuses to cut interest rates again over coming months which suggests the Australian dollar is likely to fall further.

The Australian dollar exchange rate complex has rallied on the decision by the Reserve Bank of Australia (RBA) to keep interest rates unchanged on November.

The response is predictable as markets were split on whether or not a rate cut was coming. When an outcome is virtually 50/50 the potential for a knee-jerk response in the markets is understandable.

The longer-term picture is more interesting though, despite the RBA not cutting rates, they changed their forward guidance to open up the possibility of a near-term rate cut.

Specifically, the Bank included the comment “members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”.

The fact that the Bank included this statement despite noting that “prospects for an improvement in economic conditions had firmed a little over recent months” highlights to analyst Felicity Emmett at ANZ Research the importance of the 2-3% target band for inflation for the Bank.

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We get the sense that considerations over inflation are likely to take preference to considerations over the broader economy.

You can just sense the RBA constructing the case for a cut as the Australian economy is actually not in bad shape and house prices remain elevated.

This ‘constructivism’ echoes the Bank of England who once upon a time said they would raise interest rates when unemployment fell below the 7% threshold. That threshold is now ancient history but the BoE continues to construct reasons to keep rates unchanged.

ANZ Research believe that a move in December is unlikely.

"The RBA seems more likely to wait until February when it will have another inflation number which will likely confirm the lower than previously anticipated inflation trajectory," says Emmett.

Then the Bank is likely to deliver the first of at least two cuts next year in ANZ Research’s view.

Two interest rate cuts is nothing to be sniffed at from a currency perspective; this is quite aggressive and should markets share the view then we will certainly see the Australian dollar decline.

Should economic data come in below expectations then the RBA will confirm their easing bias confirming to us that on balance the easiest path for the Aussie is lower.

Changes to the RBA Statement

Observations courtesy of ANZ:

• Concerns over financial market volatility have eased with the comment that “volatility in financial markets has abated somewhat”, although the Bank noted that “credit costs for some emerging market countries remain higher than a year ago”.
• The statement acknowledged the recent low inflation print, but repeated that “inflation is forecast to be consistent with the target over the next one to two years”.
• The recent out of cycle mortgage rate increases were alluded to, but the RBA noted that “overall [lending] conditions are still quite accommodative”.
• Importantly, the Bank seems more comfortable with Sydney and Melbourne house price developments, noting the recent moderation in growth.