The Australian Cash Rate; Recent lockdown a Huge Factor in Tapering Decision

The Cash Rate is the interest rate that the Reserve Bank of Australia (RBA) charges commercial banks for a loan. This operation provides a bulk of liquidity to the banking system. Short term interest rates are the paramount factor in currency valuation as it is highly correlated with the economic outlook because its changes can have an impact on both inflation and recession.

The core objective of RBA is to set lay down policies aimed at achieving stable inflation, maintain financial stability, full employment, and contribute to the economic development and wealth of the inhabitants of Australia.

Australia was less hard hit economically compared to other countries, as the COVID-19 pandemic shut international borders and dislocated trade, but the effective public health response and adherence to stringent lockdown measures minimized the transmission of the virus in the country.

After Australia closed its borders, the government created an economic stimulus package worth 18% of its GDP, the stimulus includes the health response package amounting to A$20 billion to secure access to COVID-19 vaccines, roll out a national vaccination program, including those in aged care, from the outbreak of COVID-19, and provided financial support to states and businesses which kept a large trunk of Australians employed.

However, the massive economic progression from the scars caused by the pandemic has been short-lived, owing to the recent outbreak of the virus and subsequent reinstatement of restrictions will restrain activities in the second half of the year, as the new wave of infections is weighing on consumer confidence, which averaged lower in July to August than in the second quarter, and even more strikingly, on business sentiment, which tumbled to a one year low in July.

The COVID-19 pandemic triggered a rapid increase in public debt, as COVID disaster payments to those losing jobs or hours worked have gone up to 1.2 million people leading to an unemployment forecast of 5.6% in September from the current rate of 4.9%.

The planned decision by the RBA to trim its weekly bond-buying to A$4 billion ($2.94 billion), from the current A$5 billion has most likely taken a twist as the resurgence of the virus and lockdown in most parts of Australia will negatively impact economic activities.

The Reserve Bank of Australia last month held its Official Cash Rate at 0.10% after it was changed to 0.25% in the month of November 2020, as early glimpses of a rising rate appear more unlikely as a result of the recent lockdown and the possible ripple effect on the inhabitants of Australia.

Across-board, a lower Cash rate will warrant recovery to the broader economy by improving cash flow, encouraging spending and investment, which will increase economic activity and boost employment.

Economists have responded by slashing their economic outlook, leaving the RBA’s recent predictions of 4% growth for 2021 looking increasingly untenable.

Regardless, traders should brace themselves up for a period of high volatility as the Cash Rate report often have a great impact on the FOREX market. An increase in Cash Rate will usually strengthen the AUD (Aussie Dollar), while its decrease will usually weaken the AUD (Australian Dollar).

Traders should always be aware that volatile markets provide great opportunities for making profits, as the increase in volatility can cause market swings for traders to capitalize on.

The currency pairs that include the AUD (Australian dollar) are mostly affected by the data release. The pairs include AUDUSD, AUDCAD, AUDCHF, AUDJPY, AUDNZD, etc.

Time Schedule for the next Cash Rate Report:

Date: Tuesday. September 7th, 2021.

Time: 5:30am (GMT + 1).

Francis Idowu is a Forex Dealer, Financial market analyst and writer, Data Analyst, and Financial Market Strategist with a background in Economics. He specializes in market strategies, Forex fundamental and technical analysis, and has spent over two years as a financial market contributor, observer, and trading coach. He is well known for his informative analysis of the global economy, fiat currency, commodities, Stocks, Indexes, Futures, and Options markets. He held a Bachelor's degree in Economics and Diploma in Structured Programming and Data processing.