SYDNEY: The plunge in global oil prices could give Australia's central bank leeway to reduce interest rates with the aim of pushing the Australian dollar down to levels the bank would like to see.
The Reserve Bank of Australia has long wanted a lower exchange rate to help the economy adjust to rapidly fading mining investment and to relieve the pain of hefty price falls for its main export, iron ore.
The Aussie dollar fell 4.1 percent in December and reached its lowest in over five years this month, but appeared to have found a tentative base near 80 US cents.
RBA Governor Glenn Stevens suggested last month that an even weaker level, of about 75 US cents, would be fair value.
But, since cutting its cash rate to a record low of 2.5 percent in August 2013, the central bank has refused to lower rates further partly due to worries that cheap borrowing costs could fuel an unwanted asset price bubble.
While overall inflation has been contained so far, any risk of igniting inflationary pressures through a weaker currency will be offset by a halving in oil prices in recent months. Australian petrol prices are at their lowest in four years.
Fourth quarter consumer price data due out later this month is expected to show inflation near the floor of the RBA's long-term target range of 2 to 3 percent.
Commonwealth Bank chief economist Michael Blythe said the odds are tilted towards a very low headline inflation outcome.
"On our estimates, petrol prices fell by 6 percent in the fourth quarter and will reduce CPI growth by 0.22 percentage points," he said.
"Our preliminary forecasts have the headline CPI rising by 0.2 percent.
Annual growth at 1.8 percent would be below the RBA's target band for the first time since mid 2012." For the market, such an outcome would no doubt strengthen expectations for an interest rate cut. Markets priced in an easing this year after data released in December showed sliding export prices took a heavy toll on Australia's economic growth in the third quarter.
Interbank futures implied a quarter point cut in the cash rate by May and a near half a point easing over the next 12 months. For much of 2014, the RBA assured markets that "the most prudent course is likely to be a period of stability in interest rates".
Stevens gave no hint that he was in a hurry to change that message during an interview with the Australian Financial Review last month. But, helped by falling energy prices, the RBA could switch to a clear easing stance to help weaken the Aussie a little further.
"It would certainly kick things along if they do resume an easing bias in February. That would probably produce some fresh selling," said Sean Callow, senior currency strategist at Westpac Bank.
Callow, though, saw fair value for the Aussie in the 79-81 range and suspected that reaching 75 would require a nasty surprise in the form of a substantial slowdown in China, Australia's biggest export market.
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