Australian Dollar Plunges After RBA Reveals It May Cut Official Interest Rates

The Australian Dollar spiked to the downside early Wednesday after the Reserve Bank of Australia (RBA), led by Governor Philip Lowe, revealed it may cut official interest rates. Lowe also added the economy could be weaker than it had forecast. The AUD/USD was trading flat at .7236 ahead of the news, but plunged sharply lower to .7170, erasing all of yesterday’s gains.

Speaking before the National Press Club in Sydney, Dr. Lowe said the RBA’s central forecast is for dwelling investment to fall by 10 percent over the next two-and-a-half years.

Before the speech, financial market traders had priced in the chance of a rate cut this year at better than 50-50 even though the RBA said as recently as Tuesday that its most likely next move would be to increase the cash rate. Based on the current price action, it’s pretty obvious that traders have already begun pricing in an increased chance of a rate cut.

RBA May Have to Make Changes

Dr. Lowe also confirmed on Wednesday that the central bank may have to change its position. On Tuesday, the AUD/USD rallied as the central bank came across as less-dovish as expected. However, this is likely to change.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios were it is down,” he said.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

Jobs market and Concerns Over Low Wages.

“If Australians are finding jobs and their wages are rising more quickly, it is reasonable to expect that inflation will rise and that it will be appropriate to lift the cash rate at some point,” he said.

“On the other hand, given the uncertainties, it is possible that the economy is softer than we expect, and that income and consumption growth disappoint.”

“In the event of a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed.”

Concerns Over Falling Housing Prices and Consumer Debt Levels.

“Continued low income growth, together with falling housing prices, would be unwelcome combination and would make for a softer outlook for the economy,” he said.

“Some Australian households have high levels of debt, so there is a degree of uncertainty about how they would respond to this combination. So we are monitoring things closely.”