AMP’s Shane Oliver has dispelled concerns regarding the impact the falling Australian dollar could have on the RBA’s February meeting, noting that the central bank looks at the dollar trade weighted index (TWI) which has experienced a “less severe” drop.
While the Australian dollar relative to its US counterpart has come down from US$0.69 at the start of October to US$0.62, the TWI has fallen just 5 per cent since the end of 2023.
“I think the risks on this front are low as while the Australian dollar is down about 10 per cent versus the US dollar from where it was at the start of last year, it’s only down about 5 per cent against the trade weighted average because other currencies have also fallen against the US dollar and both the Australian dollar/US dollar and trade weighted index are still in the same range they have been in for the last four years now, albeit at the bottom of that range,” Oliver told InvestorDaily.
“What’s more, apart from higher petrol prices and maybe some international airfares, it will be hard for importers to pass on higher import prices to consumers given weak discretionary demand. So, while the fall will be of concern to the RBA, I don’t think it will stop them easing and ultimately, they will be driven by domestic inflation,” the chief economist said.
Oliver believes the RBA is likely to begin cutting rates in February, especially if the December quarter trimmed mean inflation outcome is around 0.6 per cent quarter-on-quarter or less.
Last week, ANZ became the first major bank to change its rate forecast.
Namely, the bank, which previously moved back its rate cut expectations to May, said on Friday “the weaker-than-expected monthly CPI indicator for November” prompted it to downgrade its Q4 trimmed mean inflation forecast and to adjust its rate expectations.
ANZ now expects the RBA to cut the cash rate by 25 bp at its February meeting, before pausing until another equal cut in August, taking the cash rate to 3.85 per cent.
CBA was the only big four bank still entertaining a February rate cut even prior to the release of the latest monthly CPI print.
NAB and Westpac are for now maintaining their May rate cut expectations.
Australian dollar vulnerability to persist
Oliver predicts the Australian dollar will remain vulnerable to more downside against the US dollar with a risk it falls below US$0.60. This is particularly likely as the RBA cuts interest rates by more than the Fed, and US tariffs prop up the US dollar.
But despite the expectation of a further downward slide, Oliver noted the threat to inflation remains weak, albeit it is a risk.
“If the Australian dollar keeps falling, the risk of a boost to inflation will rise and it will be more of a constraint on RBA easing,” the chief economist said.
Oliver expects the RBA to cut the cash rate to 3.6 per cent this year.
