Economic Policy Down-under Turns Stimulative

Daily Forex Fundamentals | Written by Wachovia Corporation | Feb 03 09 15:04 GMT |

The RBA cut its main policy rate by another 100 bps, and the Australian government announced a fiscal stimulus package. These measures should help to limit the severity of the incipient recession down-under. In our view, the Aussie dollar will consolidate over the next few months before moving higher by the end of the year. RBA Slashes Rates and Government Announces Fiscal Package The Reserve Bank of Australia (RBA) cut rates by 100 bps at its regularly scheduled policy meeting today, taking its main policy rate to a 45-year low of 3.25 percent (see top chart). In announcing its rate cut, the RBA pointed to the deterioration in the Australian economic outlook that is due in part to the unfolding global recession. The RBA is mandated by law to keep CPI inflation within a two percent to three percent target range over the "medium term." Inflation rose to 5.0 percent in the third quarter of 2008, but it is now receding and should move even lower in the quarters ahead (see middle chart). Therefore, the RBA judged that "a further sizable reduction in the cash rate was appropriate." The RBA gave no forward guidance but further easing is possible in the months ahead, especially if global economic conditions continue to deteriorate. The Australian government also announced a fiscal stimulus package worth A$42 billion (about US$27 billion) over four years. The package includes tax rebates that will be paid in March and April, which the government hopes will help to stimulate consumer spending in the near-term. There are also tax breaks that businesses can claim for investments made between now and the end of the year. The government will also spend A$15 billion on new and upgraded schools over the next few years. Aussie Dollar Should Consolidate Before Moving Higher Real GDP data for the fourth quarter will not be released until early March, but most monthly indicators suggest the economy weakened significantly at the end of the year. Indeed, the Australian economy has probably slipped into its first recession since the early 1990s. The stimulative measures announced today should help to limit the severity of the downturn. That said, further intensification of the global recession would weigh on Australia’s exports, which could lead to another down-leg down-under. The Australian dollar has dropped about 35 percent versus the greenback since last July as commodity prices have collapsed (see bottom chart). In the near term, the Aussie dollar could drift lower as investors fret about the global economy and its effects on the Australian economy. The Aussie dollar could conceivably fall below the five-year lows set last autumn if weaker-than-expected global economic activity causes commodity prices to decline even further. However, we project that most economies will hit bottom over the summer before beginning a sluggish recovery later this year. As global economic conditions begin to improve, commodity prices should rise, giving a boost to the Aussie dollar at that time. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.