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Plummeting dollar won't stop further rate cuts: economist

AMP Capital’s Shane Oliver says the “tenuous nature of growth” in the Australian economy will force the central bank to continue cutting rates.

Late Tuesday night and early Wednesday morning, the Australian dollar was trading around US$0.70, in what many thought was the result of volatility in Chinese share markets. 

However, Australia first had to look to markets in Europe and the US, which were reacting to weaker than expected economic data out of China, before the impact was fully realised on the Aussie, according to Mr Oliver, who expects the dollar to continue falling towards US$0.60.

RBA governor Glenn Stevens has repeatedly said the RBA wants the dollar to come down to a level where it can start to boost economic growth. 

But Mr Oliver believes further rate cuts are likely if the dollar is to keep going down. 

“The further the Aussie dollar goes down it takes some pressure off the Reserve Bank, but I’m kind of thinking that at some point you will need lower interest rates, or the talk of lower interest rates to get the dollar to keep falling,” Mr Oliver told Mortgage Business

“The tenuous nature of growth in Australia remains. 

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“We are still battling the unwinding of the biggest mining investment boom in our history. 

“If you continue to run growth below potential for an extended period of time then you end up with a build-up of excess capacity, which in turn means more downward pressure on inflation.”

If this happens, Mr Oliver said, then at some point the RBA would be asked to explain why inflation is chronically running below target. 

“They would probably rather avoid that, which is why they would cut again,” he said. 

The Reserve Bank left rates on hold at two per cent this week. In a statement, on Tuesday, announcing the board’s decision, Mr Stevens gave little clue as to the central bank’s next move.

“The Reserve Bank could still cut rates,” Mr Oliver said “but they haven’t expressed a lot of enthusiasm lately for it.”

“I think the Reserve Bank would prefer some help form Canberra, particularly in terms of economic reform." 

Mr Oliver admits that other than the official cash rate, there are not too many levers the RBA can pull. 

“They pulled a lever via APRA in terms of trying to slow down the investment property market and presumably they can pull other levers which would work in the other direction, but I don’t think they’d be prepared to do that,” he said. 

Mr Oliver said the November RBA meeting is the next one to watch.

“Failing that then expect a move early next year,” he said. 

“While in an ideal world it would be good to see more of focus on economic reforms to drive stronger growth, the political reality means that this will be hard to achieve any time soon.”

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