Misunderstanding a blunt message

The market appears to have misinterpreted the message in the RBA’s recent cash rate cut. Somehow the very clear set of messages in Glenn Stevens’ statement have been mangled, with the market interpreting the RBA may have removed its monetary policy easing bias and is relying on the US Federal Reserve to help it lower the Australian dollar. Local financial markets reacted differently to what would normally be expected after a cut – pushing up the Australian dollar and government bond yields and pushing down the share market. The market reacted as if the RBA has changed its guidance to the May cash rate cut being its last. With inflation looking likely to stay inside the target band for the next year or two and the RBA suggesting the Australian dollar exchange rate is “likely and necessary” to depreciate, perhaps the RBA’s quarterly Monetary Policy Statement (MPS) out on Friday will be an opportunity to reinforce its message to the market: “the inflation outlook provided the opportunity for monetary policy to be eased further”. Read the full paper here: (VIEW LINK).