What To Make Out of Today’s RBA Interest Rate Decision

No changes at today’s Reserve Bank of Australia (RBA) meeting – as expected. Despite the fact that the Australian Dollar (AUD) runs at its highest value in some time, the RBA chose to leave the monetary policy unchanged.

Not that it has much to do to influence the AUD’s strength. Fueled by a combination of lower USD and higher commodity prices, the AUD is one of the best performers during the COVID-19 crisis. It even outperformed the Euro, as seen by the declining EURAUD cross pair that gets closer to 1.60 after dealing as high as 1.96 in March.

RBA, the Australian Dollar and Winter

Six months into the pandemic and the world somehow learns to cope with the situation. Economies are not in danger of being closed anymore; hospitals got their act together, and supplies arrived; doctors learned what works best to fight the virus, and so on. We are better prepared for this battle. But it is not over.

All eyes are on Australia and on how it deals with the virus during the winter months. It will act as a benchmark for the rest of the developed world. The message is clear – if Australia can do it, the rest of the developed world can too.

The RBA decided to keep the monetary policy unchanged – the cash rate and the yield on the 3-year Australian government bonds. Like all major central banks, the RBA keeps the interest rate (i.e., cash rate) close to the zero boundary (currently, the cash rate is at 0.25%). However, unlike other central banks (i.e., the Fed), the monetary and fiscal stimulus were far smaller. As a consequence, the M2 money supply, while increasing, is nothing compared to what is happening in the United States and even in the Euro area.

The Australian Dollar and the Australian economy benefited from higher commodity prices. As a major exporter, the rise in prices offset part of the Australian Dollar’s appreciation. Also, China recovered quite fast from the virus. It is viewed as one of the few economies to post economic growth in 2020, and it is importing raw materials from Australia.

Despite all this, the RBA is facing an economic slowdown not seen since the 1930s. Unemployment and underemployment remain high, wages and price pressures remain subdued, making it primordial to keep the fiscal and monetary support in place for quite some time.

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