RBA cuts rates: On the 3rd May the Reserve Bank of Australia (RBA) took the decision to cut interest rates in response to recent signs of weak…
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inflationary pressure. While the move itself was not a complete surprise (55% probability priced in prior to RBA meeting), the quarterly monetary policy statement that accompanied the meeting revealed that the bank’s central view towards inflation had taken a marked shift. The bank had slashed inflation forecasts by 50-100bps to reflect a new base scenario, whereby underlying inflation would sit at the bottom of the target 2-3% range for the entirety of the forecast period (to Jun-18, see Figure 1). Since the meeting, the AUD has fallen 3.3%* on a trade weighted basis but market pricing of further cuts have not really moved (only one further cut priced in this year). Going forward, we believe that in the near term, the AUD has potential to come under further pressure, especially if Australian inflationary measures remain subdued and prompt the RBA to pursue a more aggressive easing path.