All eyes will be on the Reserve Bank of Australia’s meeting today. We expect the central bank to lower the cash rate target for the first time since November 2020 by 25 bps to 4.10%. If the RBA signals the start of a rate-cutting cycle and a more balanced monetary policy stance, AUD/USD could reverse this month’s recovery from 0.62 to 0.6360. CPI inflation has returned to the 2-3% target range, with the worst GDP growth since 4Q20, pressing wage growth lower and the unemployment rate higher. The RBA considered US tariffs a more significant threat to the economy than inflation. In December 2023, the Australian government and the RBA formalized an agreement establishing a dual mandate – price stability and full employment – for the central bank. The futures market has priced in another two RBA rate cuts in May and August this year.
A reality check awaits the NZD today at tomorrow’s Reserve Bank of New Zealand meeting. NZD/USD was flat at 0.5735 overnight after a three-day rally stalled at its resistance around 0.5750. A correction lower to 0.5650 awaits the NZD if the RBNZ delivers a dovish cut. We expect the central bank to deliver its third consecutive 50 bps rate cut at tomorrow’s meeting. If so, this will lower the official cash rate to 3.75% after a cumulative 125 bps decline to 4.25% in August-November 2024. The OIS market expects the RBNZ to keep lowering rates to 3% this year, which is the top of the 1-3% inflation target range. CPI inflation was contained at 2.2% YoY in 2H24 amid a recession that lifted the unemployment rate (4Q24: 5.1%) to its highest level since 3Q20. The poor economic prospects have resulted in a record number of New Zealanders leaving the country to seek better opportunities overseas. The Luxon government has responded with pledges to increase foreign investment and tourism. The finance ministry is mulling a reduction in the 28% corporate tax rate at the May 22 budget announcement.
Quote of the Day
“Tough times never last, but tough people do.”
Robert H. Schuller
February 18 in history
In 1879, French Sculptor Frédéric-Auguste Bartholdi was awarded a US patent for his design for the Statue of Liberty.
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