Weak Aussie May Have Done the Job for RBA for Now
The Reserve Bank of Australia (RBA) is unlikely to cut interest rates on Tuesday, as the sharp drop in the Australian dollar has done most of the work for the central bank, analysts tell CNBC.
Kieran Davies, economist at Barclays, said the markets are currently pricing in a 22 percent chance of a 25 basis point rate cut, down from 55 percent earlier this month.
"The RBA seems likely to leave the cash rate unchanged given the further steep fall in the exchange rate," Davies said in a note on Monday. "The RBA will probably retain its easing bias, although the recent rephrasing of the bias suggests that the hurdle to cutting again has increased given the large fall in the real exchange rate."
(Read More: Crumbling Aussie—Why Economists Aren't Worried)
Scott Cavanough, senior vice president of financial markets at Compass Global Markets, backed that sentiment saying that the big fall in the Aussie dollar over the past month will be having the desired effect of an interest rate cut.
"A drop in the currency is probably helping the RBA policy. At this stage, if Aussie (dollar) holds above that 90 cent level, then there'll be less chance of an interest rate cut - certainly if it falls down to into the 80s, then a chance of an interest rate cut will drop," Cavanough said.
The Australian dollar fell to a 34-month low on Monday to $0.9110 - levels unseen since September 2010. That's down over 13 percent from its peak this year in January of $1.059. The currency has taken a beating on falling commodity prices, a slowdown in Australia's largest trading partner China and the likelihood of tapering of monetary stimulus in the United States.
The RBA left its key interest rate unchanged in June after cutting rates by 25 basis points in May to a record low of 2.75 percent, but it has maintained its bias towards easing to boost the economy if needed.
Davies of Barclays said the central bank should signal that it would like to see the currency fall further, given that Australia's terms of trade has resumed falling and should continue to decline given the rapid growth in the supply of bulk commodities. Barclays expects the country's trade data due on Wednesday to show that its surplus increased to $275.8 million in May on stronger bulk commodities. Customs data showed that imports of goods rose by 2 percent in the month, Barclays said.
(Read More: Australia Holds Fire on Rates, but for How Long?)
"He [RBA Governor Glenn Stevens] will likely welcome the drop in the currency and look for further weakness, and also seems likely to push back on recent talk of recession," Davies said.
Talk of a recession in Australia after 21 years of uninterrupted economic growth has been growing louder after the economy grew at a slower than expected pace of 0.6 percent in the first quarter from the previous one - heightening fears brought on by an imminent peak in mining investment and a slowdown in China.
(Read More: Dreaded R Word Catching Up With Australia)
Clifford Bennett, chief economist at White Crane Reports said concerns about the impact of a slowing Chinese economy, which has fueled Australia's mining boom, could lead to at least one more interest rate cut by the RBA.
"I think we're going to hold at 2.75 percent or have just one more cut possibly to 2.5 percent - that would be the end of the easing cycle in Australia," Bennett added.
- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu