In the early hours of yesterday morning the Reserve Bank of Australia cut interest rates by 0.25% and many forecasters are suggesting this is only the beginning and further cuts could materialise in August and November of this year. Governor Philip Lowe announced that interest rates were cut “to support employment growth and provide greater confidence that inflation will be consistent with medium-term target”.
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Another reason why the RBA cut interest rates was due to the declining housing market. For example, house prices are down 15% in Sydney and in some areas of Australia prices have dropped by 20%. Cutting mortgage rates should give a boost to the housing market however due to the tightening of lending standards by the Royal Commission last year, a cut of 0.25% is unlikely to make much difference therefore another 2 cuts this year looks likely.
When a central bank cuts interest rates we tend to see the currency devalue. However, it’s been widely expected that the RBA would cut interest rates and the only reason they didn’t cut last month was due to the Australian elections. As it was widely expected the Australian dollar hasn’t loss value against sterling and in fact the pound has declined rapidly against the Australian dollar over the last month.
The ongoing Brexit saga is the problem for clients that are buying Australian dollars with sterling. Now we know that Theresa May will depart in the weeks to come once the leadership contest is over, it looks like the UK could change their approach regarding the negotiations.
If a Brexiteer takes control and the EU are not prepared to discuss the withdrawal agreement, as the UK have triggered Article50 the UK could crash out of the EU by default come the end of October. Short term, I find it difficult to see how the pound will make any inroads against the Australian dollar therefore considering buying Australian dollars may be wise.
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