Interest Rates and the Australian Dollar

Tuesday, June 25, 2019

The Reserve Bank of Australia (RBA) announced a cut to the official interest rate early in June by 0.25 basis points. Lower interest rates will help keep the Aussie dollar down and Australian companies probably need that to get a bit of a boost when it comes to competing internationally.The Australian dollar likely faces further downside. The main reason is that Australian growth is weaker than US growth, and also spare capacity is much higher in Australia.

The Reserve Bank of Australia (RBA) announced a cut to the official interest rate early in June  – the first cut for almost three years. The 0.25 basis point cut brought the official cash rate down to 1.25 per cent.

The decision reflects concerns about the economic outlook, wages growth and inflation.

We have recently seen slower economic growth due in part to the housing downturn and there are concerns more generally about the global environment and its impact on Australia. There are also increasing signs that unemployment is increasing again at a time when the RBA really needs more employment to drive both wages and inflation up.

While interest rate cuts are often welcome they are not good news for everyone.

People with money in bank deposits such as self-funded retirees relying on bank interest for income will be hurt by interest rates remaining lower for longer. The key for those investors is to seek advice on other investment options that might provide them better returns and a higher income flow.

Lower interest rates will also help keep the Aussie dollar down and Australian companies probably need that to get a bit of a boost when it comes to competing internationally.

The Australian dollar has appeared resilient despite weak Australian growth and Reserve Bank rate cuts, but from a bigger picture it had already fallen substantially - down 37% from its great high of $US1.10 in 2011 and down 15% from a high in January last year of $US0.81.

The $A is largely driven by swings in the prices of Australia's key commodity exports (iron ore, coal, gold, wheat, copper) and also relative interest rates e.g a fall in Australian rates relative to US rates makes it more attractive to park money in the US and hence pushes the $A down.

The Australian dollar likely faces further downside. The main reason is that Australian growth is weaker than US growth, and also spare capacity is much higher in Australia - our labour market underutilisation is 13.7% while just 7.1% in the US; growth in Australia is running at 1.8% year on year compared to 3.2% in the US; and the drag on growth from the housing downturn is likely to keep growth relatively weak in Australia for the next year or so.

This will likely keep inflation lower in Australia than the US and so the RBA may cut rates more than the US.  The Reserve Bank is also much closer to having to do quantitative easing to boost growth than the Fed.

This all has an impact on the investment forecast and with such market forces afoot it is wise to consult you Financial Adviser to make sure you have the best investment strategy in place to meet your needs.

For more Information contact Mark Digby at Maher Digby Securities Pty  Ltd - Financial Advisers – AFSL No. 230559 Ph: 07 5441 1266 or visit our website www.maherdigby.com.au  This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such.  Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor

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