As the UK referendum on Brexit nears in fact in 3 days' time, fears are now easing for a possible exit and markets although watching closely are feeling relatively relaxed that UK will vote to stay on. Markets are expected to be extremely volatile though and large volumes are expected to be transacted over the next 3 days which may cause swings in stock indices and major commodity trades such as Oil. Against the Aussie, GBP fell to a low of 49.25 on 26 May but since then have been rising steadily to 52.21 on Brexit fears but eased back to 51.24 as concerns have started to ease. The Brexit fears concerned the market as a UK exit could trigger similar plans by other EU countries such as Spain and that could result in a further breakdown of the entire EURO zone and a disastrous effect on the already flagging economy.
WILL THE RBA REBALANCE ITS INFLATION TARGET
A number of Central Banks publish inflation targets and support monetary policy decisions by changing interest rates to maintain price stability in the economy. The RBA has been targeting a 2%-3% inflation target in its monetary policy setting. The May rate cut was announced by the RBA on the back of a very weak March quarter CPI data and longer term CPI forecasts tracking towards the low 2% end of the target band. The RBA had a dilemma with the rate setting task as the economy printed strong labour market data which perhaps did not point to an obvious easing of the monetary policy. However the inflation targeting outweighed according to the RBA in its rate setting decision in May and the official cash rate was reduced from 2% to 1.75%.
We believe that in the near term global growth numbers are unlikely to be in the 5% mark for some time. With productivity improvements delivering lower cost of production for outputs, we believe that the RBA inflation targeting band needs to be re balanced. It is interesting to note that the inflation targeting by RBA is one of the highest in the mature economies. The United States did not officially target inflation in its monetary policy decisions until former Governor Ben Bernanke set a target of 2% in January 2012. The Bank of Japan, the Bank of England and the Riksbank of Sweden all have inflation target of 2%. The ECB and the Swiss National Bank have targets below 2%, while Canada and New Zealand have a band of between 1%-3% as their targets. We believe that there is a case to target a lower inflation target here in Australia which will remove the apparent imbalance in policy setting among advanced economies and will bring Australia in line with major economies who are all trying to adjust to lower global growth numbers.
We believe that in the near term global growth numbers are unlikely to be in the 5% mark for some time. With productivity improvements delivering lower cost of production for outputs, we believe that the RBA inflation targeting band needs to be re balanced. It is interesting to note that the inflation targeting by RBA is one of the highest in the mature economies. The United States did not officially target inflation in its monetary policy decisions until former Governor Ben Bernanke set a target of 2% in January 2012. The Bank of Japan, the Bank of England and the Riksbank of Sweden all have inflation target of 2%. The ECB and the Swiss National Bank have targets below 2%, while Canada and New Zealand have a band of between 1%-3% as their targets. We believe that there is a case to target a lower inflation target here in Australia which will remove the apparent imbalance in policy setting among advanced economies and will bring Australia in line with major economies who are all trying to adjust to lower global growth numbers.
MARKET DATA
| Australia Cash rate Australia 90 day bank bill Australia 10 y bond US 10y Govt bond AUD/USD AUD/EUR AUD/JPY AUD/CNY ASX 200 S&P 500 Dow Jones Shanghai Composite Brent Oil (USD per BBL) Gold Spot (USD per oz) *Iron Ore 60% MBIOI-IR index USD/t (Updated Wednesday) | As at 17-Jun 1.75 2.00 2.13 1.61 0.7389 0.6570 77.11 4.8678 5,162 2,071 17,675 2,885 49.17 1,289 44.46* | As at 10-Jun 1.75 2.01 2.10 1.68 0.7415 0.6561 79.83 4.8660 5,227 2,079 17,732 2,833 49.84 1,282 43.76* |
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