4 Reasons Why The RBA Could Cut Rates

Nov. 06, 2012 6:20 AM ET
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Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t matter because I had no friends to play with anyway because they were all to busy hunting and gathering food as well. One day, while resting under an apple tree, an apple fell and hit me on the head. I came up with an idea where if I focused on just fishing and I could find somebody to focus on just gathering corn, maybe we could finish working faster and have enough time left to play. So I tried it and it worked. I wanted to fully understand why this worked and that’s where I discovered his love for economics. I later became a senior macroeconomics professor at Pipvard University in Pipston, Pipsachussetts. After several decades there, one day I decided to stop teaching. Leaving campus that afternoon, as I reversed out of the parking lot, I reversed into a pristine Bentley. It was Dr. Pipslow’s car. (Now a fellow blogger on BabyPips.com) He had been invited by the school to demonstrate his ability to float currencies. When we met each other, Dr. Pipslow already knew who I was. He told me not to worry about his whip and explained to me that BabyPips.com needed a macroeconomics expert and wondered if I was interested. I was. So the following day, I changed me name to Forex Gump and created Piponomics.

Heads up! RBA Governor Stevens and his men are gearing up to make their monetary policy decision on November 6, 4:30 am GMT. Here are some reasons why an RBA rate cut might be in the cards.

1. Projected economic slowdown

Just a few days ago, the Australian government announced that it slashed its growth and trade forecasts for the year. According to the Treasury's mid-year economic review, the government now expects the Australian economy to grow by 3% instead of the previously estimated 3.25% this year.

Their downbeat outlook was mostly a result of the recent losses in Australia's tax revenues, which amounted to 160 billion AUD over the past five years. Moving forward, the Treasury is expecting a 4 billion AUD writedown in tax receipts for 2013, which could eventually total to 22 billion AUD over the next four years.

Head of Treasury Wayne Swan also mentioned that they expect Australia's trade surplus to shrink to 1.1 billion AUD in 2012. This translates to a potential 8% decline in Australia's trade activity, larger than their earlier forecast of a 5.75% drop.

Their mid-year economic review also contained a proposed budget, which involves billions of dollars' worth of new savings in order to maintain their surplus. Analysts say that if this proposal pushes through, it could add pressure on the RBA to cut interest rates to maintain price stability.

2. Actual economic slowdown

Minutes of the RBA's previous monetary policy meeting showed that policymakers were concerned about the prolonged effects of the ongoing global economic slowdown on the Australian economy. In particular, they noted that the downturn in Chinese economic activity led to a weaker demand for steel and iron ore products from Australia.

On top of that, they pointed out that the fiscal crisis in Europe and the U.S. also contributed to the decline in Australia's exports and production. They did note that most central banks have already implemented further easing measures in order to keep their own economies afloat. Will the RBA follow suit?

3. Low commodity price inflation

In case you weren't paying attention in Economics 101 class, here's a quick review of The Law of Supply and Demand: If demand for an asset decreases while supply remains unchanged, the asset's price will drop. This is the case for Australia's commodity exports, such as metals and minerals, these days.

Although iron ore and coking coal have recovered from their sharp price drops in August, the prices of both commodities are still currently around 25% below their June levels. Overall, commodity prices have remained flat last month but policymakers are anticipating further downward pressure on inflation while the global economic outlook remains dim.

4. Recent AUD rallies

It's bad enough that Australia's economic growth is being weighed down by weaker demand all over the globe. Even making the Land Down Under's export situation much worse is the Aussie's persistent strength, which makes Australian products relatively more expensive in the international market.

Although AUD/USD has retreated twice from the 1.0500 major psychological handle over the past couple of months, the pair has still been trading above 1.0150 during the period. RBA officials remarked that the Australian dollar remains high by historical standards. An interest rate cut could bring its value down, and this could eventually stoke export demand and overall economic growth.

Of course there's always the chance that RBA Governor Stevens and his men could decide to sit on their hands for now and wait for more economic figures. If that's the case, make sure you pay attention to the accompanying rate statement which might have clues on when the RBA could make its move.

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