OECD: Australia had to cut rates to stop Aussie jump

In order to accelerate the economic growth, the Reserve Bank of Australia (RBA) has cut the official cash rate to a historic low of 1.5% on Tuesday. Now the OESD says that it knows the real reason behind this move. What are the further perspectives for Australian dollar?

3 August, AtoZForex – The Organization for Economic Co-operation and Development (OECD) says that on Tuesday Australia had to cut rates to avoid currency jump. RBA’s move aimed to stop the yield-hungry investors from driving up the currency further.

Australia had to cut rates: the real reason

Glenn Stevens, RBA Governor, cut the cash rate to the all-time low of 1.5% this Tuesday. As soon he will be succeeded by his deputy, Philip Love, the inheritance he is leaving is contradictory: very low inflation along with the limited ammunition to fight it. The problem for policy makers is an excess capacity that is pushing down the inflation. Adrian Blundell-Wignall, a special adviser to the secretary-general of the OECD and former Reserve Bank of Australia official elaborated on the cause of the RBA rate cut:

“You can’t run monetary policy as though there are no other rates in the world economy. When yields have been driven down to zero or negative numbers, then if you’ve got your head too far above the parapet, you’ll become the subject of financial interest.”

Realistic view

Australia’s economy has grown faster than the central bank speculated. However, the wage growth and core inflation are both at historical lows. Meanwhile, since its mid-January trough, the Australian dollar has rebounded nearly 10%. The depreciation in the exchange rate would be the best result for Australia. However, the realistic view suggests that with low rates across the developed world, the best it can achieve now is getting the Aussie to hold its ground.

“Historically, even with a floating exchange rate which says you can have independent monetary policy, you can’t be totally impervious to what markets are doing and what they’re searching for,” Blundell-Wignall said.

See also: RBA cuts rate: what is next?

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