The World Overall One Financial | Andrei Wogen| finance.wogen@gmail.com| 02-03-15

RBA Shifts Policy….FinallyAfter a year-and-a-half of neutral policy, the RBA cut their main interest rate on Wednesday (Australia time). This was sort of inline with expectations and sort of not. The market was split pretty much down the middle with some expecting a rate cut and others not while pretty much everyone expected a shift in their policy language and tone to a more dovish tone. In the end we got both…..a rate cut and a shift in the tone of the RBA. In their statement, the Bank sounded dovish on inflation but expect it will be temporary as energy prices are expected to rise again. As for growth and employment, these areas is where some of their main concerns reside. As for the growth story, the Bank continues to see growth residing below trend for the time being driven mostly by lower commodity prices and a weakening employment sector. As already mentioned too, the weakness in the employment sector was another main concern of the RBA with this particular part of Australia’s economy expected to continue to negatively effect domestic demand. Global growth was mentioned too and the tone there was very dismal as well. Overall then the RBA definitely and drastically changed their tone towards the economy and their expectations going forward during this meeting. As for the exchange rate, this was another key part of the RBA’s minutes. They continue to view the exchange rate as being too high especially, in their view, especially when compared to the “significant declines in key commodity prices”. They view a lower exchange rate as being key to foster balanced growth in the economy. One wonders then how much of this rate cut was due to weakening economic fundamentals and how much of it was due to the Bank wanting the exchange to fall further. This line of thought would be inline with the current currency war going on in the world right now and so is the most likely scenario especially when looking at the fundamentals. Recent Trimmed CPI, which is the inflation data the RBA watches, actually gained a bit in the most recent release of the data. As for the rest of the economy, it is weak but I’m not so sure if it is weak enough for a rate cut yet. However with the RBA continuing to expect a decline in the economy, this move in rates could also very likely be a front-running move ahead of changes in the economy that they are expecting, which is to the downside. As a side note too, I am also expecting a continued weakening in Australia’s economy. All-in-all then, considering all sides of the issue at hand, the question is “What’s next from the RBA”? The RBA didn’t really give much indication on what could be next for policy but given their downbeat expectations of growth and their continued desire to see the AUD

decline further, I am personally expecting them to continue their now dovish stance and I also expect them to cut again, ending this year at two percent. This expectation comes from what I expect will be continued weakening of the global economy, especially China, a continued desire by the RBA for the AUD to move lower and due to what I expect will be a weakening Australian economy. The one thing to watch though, and I expect will very likely cause concern by Australian officials is the housing market. With even lower rates now, the housing market will very likely continue to strengthen even further. The one bright side of this though would be if the consumer is benefited by this strong housing market. Though at this point, with the housing market as strong as it is now, this transfer to the consumer has been weak.