Sterling strengthened versus the Australian dollar on the interbank market this week, even though the world’s investors continue to await evidence of firmer progress in the UK’s and the EU’s Brexit negotiations.

In part, this is because the Reserve Bank of Australia (RBA) has cut interest rates to a new all-time low of 0.75%, and may reduce borrowing costs further in future, while Australia’s economic data this week has disappointed.

Reserve Bank cuts to new all-time record low

Australia’s central bank reduced interest rates by -0.25% this Tuesday 1st October, to 0.75%, their historical low. The RBA did this, first to cut Australia’s unemployment, which at 5.3% is well above the RBA’s objective of 4.5%, and second, to bring Australia’s inflation from its current 1.6%, back to the 2.0%-3.0% target range.

Lower interest rates make it likelier that the Reserve Bank will reach its objectives, by making it cheaper to take out loans. Arguably however, the fact that the RBA has had to cut interest rates so low also bodes ill for Australia’s economic outlook, by suggesting that Australia needs very easy monetary policy to continue to expand.

Coronavirus continues to threaten the Australian economy

RBA could cut further in 2019/20, launch Quantitative Easing

Moreover, looking ahead, it’s possible that Australia’s central bank might feel obliged to cut Australia’s borrowing costs even further, to support Australia’s economy. According to economists’ forecasts, Australia’s interest rates will stand at just 0.36% by November 2020, implying that the RBA will cut once or twice more in the next 13 months.

In fact, there’s even speculation that the RBA could begin its own form of Quantitative Easing (QE), or extraordinary money printing, to further reduce Australia’s borrowing costs. This would mimic moves by the Bank of England, European Central Bank, or US Federal Reserve during the last financial crisis.

Australia’s trade surplus shrinks, building permits fall

In addition, it’s worth noting that many of Australia’s economic releases this week disappointed too. For example, Australia’s building permits fell by -1.1% in August, according to the Australia Bureau of Statistics (ABS) this Tuesday, below forecasts for a +2.5% rise.

Meanwhile, Australia’s trade surplus unexpectedly fell to +AU$5,926 million in August, said the ABS, beneath predictions for +AU6,000 million. In large part, this is because Australia’s exports fell by -3.0% in August, while imports remained flat, suggesting that Australia is also victim to the USA’s and China’s trade war. If Australia’s economy decelerates further, this may affect the Australian dollar in future.

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