EUR/AUD Slides as RBA Cuts Rates

Alan Penny

2 July 2019

3 min read

Australian flag

Tuesday saw the EUR/AUD exchange rate fall by 0.3%, with the currency pair trading at AU$1.6155. The Australian dollar strengthened against the euro, even though the Reserve Bank of Australia cut interest rates.

Philip Lowe, the Governor of the RBA, justified the rate cut by explaining that it would help speed up the reduction in unemployment, as well as driving further progress towards achieving inflation targets.

He continued to explain that the tech and trade disputes are causing uncertainty, which is having an impact on investments. Though the global economic outlook “remains reasonable,” the uncertainty could still negatively impact the economy.

While the Aussie dollar received a slight boost from the rate cut, which has resulted in alone of the lowest rates in the world of 1%, it could not maintain its gains. By the middle of the U.S. trading session, the euro was trading for AU$1.62.

The rest of Lowe’s speech did not help the AUD overly much as he called on the government to take more measures to improve the economic situation in Australia. He stated that the country shouldn’t be relying solely on monetary policy.

This statement comes on the back of analysts predicting the more cuts would be required to drive up wages and lower unemployment. Unfortunately, the RBA is somewhat limited in how many more rate cuts it can push through.

Thus, Lowe suggested to Treasurer Josh Frydenberg that it would be health to increase borrowing and to spend more on building up the infrastructure. He also suggested an increase in productivity and fiscal measures.

Lowe stated that all of society would benefit from improved results if the different branches of public policy were all headed in the same direction.

Frydenberg didn’t seem to agree with Lowe’s stance as he said the fundamentals seemed “sound” even though Australia is facing so many international and local issues that they’ve had to cut rates to the point where they have the sixth lowest rate in the world.

However, Frydenberg feels that being confident in the economy and speaking positively will encourage further confidence.

Tax Cuts to Help, But More Is Needed

The Australian Tax Office will be increasing tax returns by $1,080 for millions of workers in July on the back of a $158 billion income tax package spanning ten years that the Coalition will soon by passing.

Though Lowe agreed that the tax cuts would be beneficial to families who were struggling, he feels it’s not enough. He stated that further support should be provided via a weaker Aussie dollar, high commodity prices, and the advantages offered by the lower rates.

Monetary policy can’t bring down unemployment on its own, which is where an increase in consumer spending would come in as it would help significantly. While the jobless rate currently sits at 5.2%, the RBA feels that it needs to drop to at least 4.5%.

Lowe also warned that the situation between the United States and China needed to be monitored closely as the situation is taking a toll on market confidence.

He explained that many investors preferred to wait instead of committing to capital spending. If the situation continues, he feels that economic growth could suffer significantly.

Jim Chalmers, the shadow treasurer, was a little less diplomatic. He outright accused the government of expecting the RBA to do all the hard work, stating that there’s nothing in the actions of the government that could inspire any form of confidence. He called the rate extraordinary and stated that any treasurer who thought it okay was a “rubbish” treasurer.

Brendan Rynne, Chief Economist at KPMG, feels that the low rate will force the government to look into other options in terms of giving the economy a boost.

Written By
Alan Penny

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