Australian Dollar Drops Sharply After Dovish RBA Statement

Yesterday, the Australian dollar rose sharply after the PMI data from China showed some significant improvements. The data showed that the manufacturing PMI rose to above 50 in March, ending a downward spiral that has been going on this year. Investors reacted positively about this news because of the important role China plays to Australia. This is because most of Australian goods are shipped to the country. As such, any strength in the Chinese economy is a sign that there may be more demand from Australia.

This changed a few hours ago when the Reserve Bank of Australia (RBA) delivered its fourth interest rates decision of the year. As expected, the bank left interest rates unchanged at the current 1.50%. In the accompanying statement, the bank seemed dovish about the Australian economy.

On the global economy, the officials said that the outlook remained reasonable although the growth has slowed and downside risks have increased. This was followed by a slowdown in international trade and investment intentions. On global monetary policy, the bank said that the conditions were more accommodative as officials react to the new normal. The new normal is that of low inflation, low growth, low unemployment rates, low bond yields, and sluggish wages.

On Australia, the bank said that the labor market remains strong, with the unemployment rate currently at 4.9% and vacancy rate a bit higher. In some places, there are reports of skills shortage. The economy expanded by 2.3% in the fourth quarter, with the growth of consumer spending being affected by the weakness in the household disposable income. The drought in some places has affected the growth, but this has been offset by the government spending. Inflation remains low and stable but it is expected to pick up in the next few years. The statement concluded with the following:

Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.

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