Why banks won't pass on the next rate cut


The slide to record lows, therefore, could be considered a sign the markets have priced in a 25 basis point rate cut.

Australia's central bank kept rates at record lows on Tuesday while signaling future cuts if the unemployment rate failed to nudge lower as the country's retailers suffered their worst quarter in almost seven years.

It had been a tough start to the week for the Aussie following a breakdown in trade talks between the USA and China.

Further details of the decision will be made known when the Minutes for the meeting are released in two weeks and markets should get a firmer feel for the direction of travel of Australian interest rate policy.

The decision to maintain its wait and see attitude (though with an implied bias to cut rates if the labour market weakens) went against forecasts from many economists and analysts.

But the reason the average Australian mortgage rate does not match the RBA cash rate at 1.5% is the need for the banks to account for risk and generate profit for shareholders. The robust employment growth over the past year resulted in an improvement in wages.

"Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings".

The implication here, according to economists, is that any increase in Australia's unemployment rate above projected levels will see a policy response.

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The unemployment rate is expected to remain around 5 percent over the next year, which would then decline to 4.75 percent in 2021.

Looking ahead, the Pound Australian Dollar (GBP/AUD) exchange rate looks likely to rebound later in the week as the United Kingdom publishes its latest GDP reading.

The Reserve Bank did not as expected announce its first interest rate cut in more than two-and-a-half years today, just over a week out from the federal election.

The Australian dollar spiked almost half a cent against the United States dollar. HSBC is among the most bearish, with a 2019 forecast for AUD/USD of 66¢.

Other interesting AUD exchange rates include AUD/GBP, which opened on Sunday night at its lowest level in almost 3 years, at £0.53. The forecast for underlying inflation this year has also been cut to 1.75% from 2% in the February forecasts and 2% in 2020 (down from 2.25%) "and a little higher after that" whatever that imprecision means.

Constructive Brexit talks between United Kingdom politicians have imparted a sense of renewed optimism that has lifted the British pound to a 2-week high against the dollar and to a 3-week high against the euro.

The change means the bank has focused directly on the health of the still solid jobs market to determine the timing of a rate cut.

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