The Australian dollar is falling after the Reserve Bank of Australia cut the interest rate
The Australian dollar witnessed a significant decline against most currencies on Tuesday, as the Australian dollar fell against the US dollar to the level of 0.6410 dollars, abandoning its previous gains, following the decision of the Reserve Bank of Australia to reduce the key interest rate by 25 basis points from 4.10% to 3.85%.
This decision was in line with market expectations, but the signals accompanying it revealed the bank's fears of negative risks threatening the local economy.
Two additional reductions are expected in 2025
Investors still expect at least two more cuts before the end of the year, which may push interest rates to the range of 3.10%: 3.35%.
The Reserve Bank of Australia explained that its updated economic forecast assumes an overall reduction of about 85 basis points, based on slowing inflation and weak growth.
Low inflation and adjusted expectations
The bank confirmed that the data for the first quarter of the year showed an even greater decline in the inflation rate, which reduces the risk of it rising again.
The new forecasts also indicate that overall inflation will remain close to the middle of the target range (2% -3%) over the next two years.
External factors increase stress
Along with domestic factors, the bank warned that global trade developments could pose a drag on economic growth, reinforcing the need for further monetary easing.
He also lowered his forecasts for growth and inflation, which negatively affected the value of the local currency.
Political instability adds to the challenges
The political uncertainty has increased the pressure on the economy, especially after the Australian opposition coalition split and the National Party withdrew its support for the government, raising fears that it will be difficult to pass necessary economic reforms.
The impact of Chinese monetary policy
The PBOC's recent decision to cut interest rates has led to a decline in market sentiment, given the close correlation between the Australian economy and the Chinese yuan, as the Australian dollar is a liquid proxy for the Chinese currency in many trade and investment transactions.
Statements by Reserve Bank of Australia Governor Michelle Bullock:
- Inflation must now be kept low, and we are in a good position to achieve this.
- The board of Directors is ready to take additional actions if necessary.
- This is a lowering of confidence in interest rates.
- This is currently the appropriate cut, further adjustments are possible.
- We learned from companies that profit margins are affected.
- Be prepared for possible market crises. - The range of results is very wide.
- It was a unanimous decision, as we discussed fixing or lowering interest rates.
Upcoming forecasts
It seems that the Reserve Bank of Australia's accommodative monetary policy, coupled with global and domestic challenges, will continue to keep the currency under pressure in the medium term.
With further interest rate cuts expected, the Australian dollar may witness further declines, especially in light of the unclear economic and political landscape globally.
