The Reserve Bank of Australia is expected to keep the official cash rate on hold tomorrow as the falling Australian dollar begins to support economic growth, says HSBC.
In a recent update, HSBC Global Research said the RBA is likely to keep the interest rate on hold as the depreciating Australian dollar loosens financial conditions.
HSBC chief economist, Australia and New Zealand Paul Bloxham said: “Currency depreciations may not work for every country, but the lower Australian dollar is already providing clear support for Australia’s growth.
“With the Australian dollar doing the work for them, we expect the RBA to be reluctant to cut rates further, despite the slowdown in China and the recent delay to the [US] Federal Reserve’s interest rate ‘lift off’.”
The Australian dollar has fallen six per cent in trade-weighted terms over the past three months and is now at a level the RBA is satisfied with.
As a result, HSBC pointed out, the RBA has to weigh up whether further rate cuts provide more benefits than costs.
“Would the RBA want to boost housing prices and construction further at this point in the cycle? We suspect not and expect the RBA to be on hold in coming quarters,” said Mr Bloxham.
According to the update, services exports, including tourism and education have improved and the lower currency is beginning to discourage service imports.
“Net services exports have contributed more to GDP growth over the past year than resources exports, in a clear sign that the lower Australian dollar is working.
"More broadly, business conditions and jobs growth have picked up, as very low interest rates and the lower Australian dollar support growth,” said Mr Bloxham.
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