Low interest rates, cheaper petrol and a weaker Australian dollar look set to underpin the domestic economy in 2015. Glenn Stevens, Governor of the Reserve Bank of Australia (RBA), has maintained the cash rate at a record low of 2.5%. This action sends a message of stability and predictability to the Australian community and is intended to boost sentiment and confidence levels. We agree with this approach. With the RBA unlikely to cut rates further, Stevens would prefer any additional stimulus to come from the exchange rate, which he thinks "probably" should weaken further to US75c. We also believe the local currency could overshoot to US75c.
Simply put, it may be more expensive to take an overseas holiday, but it's much cheaper to fill up your tank and that's good for households. The weaker $A should also cushion the recent rapid falls in our suite of export commodities, including iron ore, coal and liquefied natural gas. Domestic housing construction has also risen and is helping to offset the negative economic impact of the slowing resource sector.
Importantly, the United States has started to power ahead in terms of economic growth and employment. The Commerce Department recently announced the US economy grew at a seasonally adjusted annual rate of 5% in the third quarter of 2014. This was the strongest level of growth in more than a decade. US petrol prices are considerably cheaper than in Australia, with Americans paying about half as much as we do at the bowser. In both countries, cheaper oil prices equate to a higher level of disposable income, which should further stimulate consumer spending. The US economy appears to have hit an inflection point and this should have positive flow on effects for the local economy and bourse.