January was a month that saw surprise changes in fiscal policy across the globe. Several central banks including Denmark, India and Singapore enacted loosening measures against a backdrop of increasing deflationary pressures as crude oil prices continue to drop.
It looks like the next easing measure will be taken by the Reserve Bank of Australia (RBA) which is meeting this week.
"Judging by price action in the market, there is a real belief the RBA are going to join New Zealand, Europe, Denmark, Switzerland and Canada in easing policy," said Chris Weston, chief market analyst at IG in a note last week.
Steady Rates Since 2013
The RBA has kept rates steady at 2.5 percent since August 2013 and many analysts expect the RBA to announce a 25 basis-point interest rate cut at Tuesday's policy meeting. Data last week showed annual inflation at the lowest level in over two years coming in at 1.7 percent for the last three months of 2014.
"While that's not low enough to provide a smoking gun to justify a rate cut, it's benign enough to provide plenty of scope for the RBA to cut in order to provide a boost to the economy," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.
Australia is suffering from 6 percent unemployment and sliding iron ore prices, one of the country's biggest exports and a reduction in rates is expected to boost the economy.
Terry McCrann, an Australian journalist and long-time RBA watcher, commented last that a rate cut is "almost certain.” This announcement sent the Australian dollar to fresh five-and-a-half year lows at 77.22 U.S. cents on Friday. According to McCrann, the RBA will forecast inflation to be lower than the mid-point of its 2-3 percent target range which would open to the door to increased easing.
Shane Oliver stated that “Weakening the Australian dollar could be the primary motivation for a rate cut.” If Governor Glen Stevens has his way, a level of 75 U.S. cents would be fair value and with the currency depreciating 4 per cent in January alone, this level could certainly be reached.
Not All Agree
Not all analysts believe the rate cut should happen now and see March as more of a possible time for introducing this easing move. Others prefer not going that route at all. HSBC is one of the few major banks calling for no change, arguing that the RBA remains too concerned with the housing market.
Economist Paul Bloxham: “In deciding whether to cut further, the RBA also needs to weigh the benefits of lower rates against the potential costs of over-inflating the housing market. We think this trade-off will see the RBA sit still with its 2.5 percent cash rate, rather than cut, but it is close."
Bloxham continues, "A key challenge for the RBA is that house price growth has been outpacing household income growth for some time…interest rate cuts could risk pushing housing price growth even faster and driving a housing bubble."