Australia is an important country in the financial market because of the resources that it produces. It is one of the most advanced economy, with a GDP of more than $1.3 trillion. Its GDP per capita is more than $54K. The country is known for the vast resources it has and its recent attempts to diversify the economy.
However, while the country is one of the most successful countries in the region, it is going through a difficult time economically. After years of gains, the country’s housing market is showing signs of weakening. In fact, house prices in major cities of Sydney and Melbourne have been falling. This is mostly because of oversupply and the lack of liquidity.
Another challenge is that Australians have some of the biggest debt in the world. Among the OECD countries, Australians household debt is third after Denmark and Netherlands. Their disposable incomes are not all that high also. The country is ranked at position 16 based on the disposable incomes.
The country is also facing the challenge of the trade war. Because of the close proximity with China, the country is usually the first to be affected when there is a trade war. This is because it is highly reliant on exports, with two-thirds of its goods being exported to China. China on the other hand has moved to punish Australia for its close relations with Western countries like United States.
For this reason, the Reserve Bank of Australia announced a 25-basis point rate cut earlier today. This brings the country’s base interest rates at 1%, which is a historic low. This was the second consecutive month of rate cuts. In the statement, the bank said that while the outlook for the global economy remains reasonable, the uncertainty generated by the trade and technology dispute is affecting investment. This means that the risks to the global economy are tilted to the downside. The bank added that:
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks. Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia. Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year.
In addition, the members said that the employment growth remains to be strong while the labor force participation being at record levels. The vacancy rates remain high and there are reports on skills shortage. At the same time, inflation remains subdued across the country. On housing, the conditions have remained soft. However, there are some improvements in Sydney, which is fueled by the growth in housing credit. On the decision to cut rates, the bank said that:
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
When a bank lowers interest rates, conventional wisdom says that the currency should drop. However, the opposite happened on the Australian dollar when the bank released its report. Instead, the Aussie rose because the announcement to slash rates was already baked-in. The chart below shows the performance of the AUD/USD pair when the decision was announced.