Australian dollar firms ahead of Reserve Bank rates decision

The Aussie dollar has nudged higher, with investors focused on the RBA’s decision on interest rates tomorrow.

The Australian dollar nudged higher today, with investors focused on the Reserve Bank of Australia’s decision on interest rates at its policy meeting tomorrow.

At 4pm (AEDT), the Australian dollar was changing hands at US71.40 cents, up from US71.00c late on Friday.

Markets are betting on a near 50 per cent chance the central bank will cut interest rates for the first time since May.

Data last week showing lower-than-expected inflation in the third quarter has around one third of economists saying a cut tomorrow is needed, especially in light of weak economic growth and concerns there will more headwinds for the economy in 2016.

Still, lowering the official cash rate from its current record low of 2.0 per cent to 1.75 per cent risks adding more fuel to the pace of house-price growth, a key source of concern for policy makers over recent years.

Australia’s bank regulator has worked all year to take some momentum out of house-price growth, especially in Sydney. Recent reports suggest it is seeing some “tentative signs” of success.

Some economists argue that the Reserve Bank of Australia will achieve little from cutting interest rates, and would be better to keep some ammunition in place in the event the economy is rocked by global shocks next year.

Data today showed that the housing sector in slowing. Capital city house prices rose just 0.2 per cent in October versus September, or 10.1 per cent on-year. Sydney and Melbourne recorded gains of 0.3 per cent and 0.6 per cent respectively, according to CoreLogic RP Data.

Tim Lawless, CoreLogic RP Data’s head of research, said recent increases in mortgage interest rates and steps by the bank regulator to curb lending to property investors have taken momentum from the market.

Meanwhile, building approvals rose in September, but the increase was driven by apartments, while detached housing approvals were weaker.

“All the drivers of the housing upswing are pointing in one direction, and that is for an easing in prices and activity: population growth is slowing, financial conditions are tightening, offshore interest is moderating and low yields are eroding investor interest,” said Paul Brennan, chief economist at Citigroup, Australia.

Currency traders are also on alert for a speech by RBA Governor Glenn Stevens on Thursday, while the RBA will announce new economic forecasts on Friday.

Dow Jones