Will the RBA cut interest rates? Low inflation continues to dominate the Aussie economy and its plausible they may act in their next decision.

Australian inflation on the verge of dropping below 1%

Inflation results for the Australian economy came out overnight, showing expectations for year now revised downwards from 1.3% to 1%, seeing a small bump in improvement for Australian Dollar buyers. Inflation is a measure of the health of the economy. If prices are rising then the confidence to continue spending contributes to the perception of long-term stability. However, with a target by the Reserve Bank of Australia of 2-3% inflation this result shows they are edging further and further away. Inflation is now down to levels similar to the financial crisis.

The result is not surprising, given that the winter period in Australia traditionally brings a lull from the lack of tourism stalling the influx of foreign capital into the UK. But this is a more extreme drop than normal, a likely cause from the persistently low commodity prices.

Does an interest rate cut seem likely?

A condition for cutting rates is normally low inflation. Lowering rates is a commonly used tool to combat the economic stagnation that low inflation represents. By diminishing the incentive to save, it encourage those holding capital to spend freely in an attempt to jump start the economy.

The knock on effect for currency is that this traditionally causes currency weakness – as the move signals instability in the Australian economy to markets, but also the Australian Dollar becomes a less desirable commodity.

However, even a cut down to 1.5% for Australia will still yield higher returns for investors compared to the likes of the US (0.5%), and the UK who may see theirs cut to 0.25% as early as next week. Those hoping for dramatically improved buying levels on the Aussie Dollar may be left waiting as even this move down to 1% inflation only caused a half cent improvement on AUD buying rates.

If the RBA cut rates GBPAUD rates may see a positive improvement, get in touch with our brokers today to discuss your options and currency needs ahead of these main events.

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