The Monetary Policy Committee (MPC) of the RBA is meeting tomorrow to deliberate on its current monetary policy, and the prevailing market expectations project no likely changes to the interest rate.
It is currently held at 0.75 per cent and given the most recently observed changes to the inflation rate, and the unemployment rate, the continuation of the current accommodative monetary policy without the introduction of any major changes seems to be the most reasonable projection.
Yet, the recent global developments might compel the Committee to seek insurance by cutting the rate with 25 basis points as soon as tomorrow.
The wellbeing of the Australian economy, much like New Zealand, is massively dependent on the uninterrupted functioning of the global supply network. Additionally, it also relies on the strength of the Chinese economy for foreign exchange.
Given the recent escalation of the severity of the coronavirus, the Chinese economy can be expected to suffer from the imposed restrictions in the country. Some experts even postulate a likely decrease of around 2 per cent of the GDP.
Therefore, in the longer-term, negative ripples from the curbed Chinese growth can be anticipated to impede the recovering Australian economy too.
Thus, the MPC of the RBA might decide to cut the rate or at least adopt a more accommodative monetary policy as an insurance against such outcomes.
Such turn of events would likely hurt the Australian dollar, which is already greatly undervalued.
The AUDUSD pair is currently trading at around 0.66800, a level that was last reached on the 19th of August 2019.
AUDUSD 1D Price Chart. Image source: Trendsharks ©, created with TradingView.com
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