The price action in the Australian and New Zealand Dollars last week was mostly driven by risk sentiment, but there was economic data released that could have an impact on prices in the near future.
RBA Keeps Interest Rates at 0.25 Percent
The Reserve Bank of Australia (RBA) kept interest rates on hold at a record low 0.25 percent. The RBA also said it would buy Government bonds to keep their interest rates down within its target.
Even as the Victorian Government imposed stage 4 restrictions across Melbourne on the weekend to contain a second wave of COVID-19 infections, the Reserve Bank board chose to keep interest rates on hold.
In July, Reserve Bank governor Philip Lowe raised the prospect of cutting rates further if necessary, perhaps to 0.10 percent, but the board held off on taking further action at the meeting.
After last week’s meeting, Dr. Lowe said Australia’s economy was experiencing its biggest contraction since the 1930’s, but the downturn was not as severe as earlier expected and a recovery was now underway in most of Australia.
“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy,” he added.
Lowe also said the RBA is now forecasting economic activity will decline by 6 percent over 2020.
Dr. Lowe also said the RBA’s latest forecasts were for the official unemployment rate to rise to around 10 percent by the end of the year “due to further job losses in Victoria and more people elsewhere in Australia looking for jobs.”
Over the following couple of years, the unemployment rate will likely decline gradually to around 7 percent, he added. The official unemployment rate is currently 7.4 percent.
This week, the focus will shift to the Reserve Bank of New Zealand (RBNZ). Last week’s labor market reports reiterated what analysts have been saying for weeks – the New Zealand economy bounced back from lockdown in far better shape than anticipated. The Treasury and RBNZ are going to have to adjust their forecasts, with interesting implications for Government debt projections, bond issuance, and monetary policy.
On Wednesday, we expect the RBNZ will keep the overall stance of monetary policy unchanged in its Monetary Policy Statement. However, the Reserve Bank will also have to revise up its near-term economic forecasts.
The economy may be stronger than expected right down, but it does face headwinds that could be a drag on the medium-term inflation outlook. They include the likelihood that the borders will remain closed for longer than previously anticipated; the rise in the trade-weighted exchange rate to 8% above the RBNZ’s May forecast; and the Government’s decision to cancel some of its fiscal stimulus package is a negative for the medium-term economic outlook.