The pound to Australian dollar interbank exchange rate fell somewhat this week, in part because of the UK’s election uncertainty, as well as its downbeat economic performance.
However, looking Down Under, the Reserve Bank of Australia (RBA) was unexpectedly positive about Australia’s economic outlook this week, and signalled that it’s no longer likely to cut interest rates in December.
The RBA’s optimism is backed up by Australia’s economic data this week, including a surprisingly large trade surplus for September. However, looking to 2020, the RBA may nonetheless have to cut borrowing costs next year, to a new low of just 0.5%.
The RBA held interest rates at 0.75% this week, as widely forecast by investors. This follows the Reserve Bank’s decision to cut interest rates by 0.25% each at the central bank’s June, July and October meetings.
So it looked likely that the RBA would keep interest rates steady this week, to allow its recent cuts to “filter through” to Australia’s economy, and monitor their effect.
However, in the RBA’s accompanying statement, the central bank was surprisingly upbeat, noting that its cuts are “supporting employment and income growth in Australia”. So it now looks unlikely that the Reserve Bank will cut again in December, as previously anticipated.
Australia’s encouraging economic performance this week backs up the RBA’s optimism. To begin, retail sales Down Under grew by 0.2% in September, matching economists’ forecasts. This points to solid consumer spending in the antipodean nation.
In addition, Australia’s trade surplus unexpectedly increased to AUD$7,180 million in September, beating forecasts for a AUD$5,000 million surplus.
When Australia enjoys a trade surplus, this means that the value of its exports exceeds the value of its imports, thus contributing to Australia’s GDP (Gross Domestic Product) growth.
However, in spite of the RBA’s optimism this week, as well as Australia’s encouraging economic data, many investors think that the Reserve Bank will reduce interest rates next year.
In particular, it’s believed that the RBA is being overly positive about the outlook for Australia’s unemployment rate, as well as the prospect that inflation will return to the official 2%-3% target range.
If these predictions prove accurate, it could affect the value of the Australian dollar, over the coming months.
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