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RBA decisions increased pressure on Australian dollar

6 Apr 2021 01:48 PM

The Reserve Bank of Australia kept its monetary policy unchanged, including interest rates at 0.10% for the fifth month in a row and the return on government bonds for three years. The main highlights of the monetary policy statement are as follow:

  • The rollout of vaccines is supporting the recovery of the global economy despite the challenges it is still facing.
  • Global developments are dominated by uncertainty.
  • Global trade has recovered, and commodity prices are higher compared to the start of the year. But Inflation remains low and below central bank targets.
  • Sovereign bond yields have surged in recent months due to positive news about vaccines and additional fiscal stimulus in the US.
  • Inflation expectations have increased from record lows and are now closer to central banks' targets.
  • The Australian dollar remains high.
  • The Australian economy is on the way to recovery and at a better-than-expected pace.
  • The unemployment rate fell to 5.8% during the month of February and the number of people with a job has returned to the pre-pandemic level. But wages are still weak and may persist for a while.
  • GDP increased by 3.1% in the fourth quarter of 2020 and household spending was a major driver of growth over the past period, in addition to the improvement in the health sector.
  • The economy is likely to continue its recovery, yet unemployment remains relatively high.
  • In the short term, CPI inflation is expected to pick up temporarily due to the reversal of some of the price cuts associated with COVID-19.
  • Core inflation is expected to remain below 2% over the next few years. In contrast, investor credit growth remains weak.
  • The bank will monitor housing borrowing trends carefully and it is important to maintain lending standards.
  • The initial $100 billion government bond purchase program is nearly complete, and the second $100 billion program will begin next week.
  • Moreover, the bank is ready to make more bond purchases if that helps advance towards full employment and inflation targets.

So, we can conclude from the above, that despite the improved recovery pace in the Australian economy, yet its early for the bank to adjust monetary policy now. The selling pressure on the Australian dollar is pilling against most of the major currencies, especially against the US dollar, with the bank indicating that the currency's value is still somewhat still high, so that the Australian dollar pair could retreat to 0.7620 levels.


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