RBA Still On Hold As Obstacles Remain Though Lowe Retains Optimistic Outlook

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The RBA kept rates on hold overnight, as was widely expected in the wake of banks such as Westpac and Suncorp deciding to independently raise their mortgage rates and economic data continuing to highlight weakness in the domestic economy. Heading into the meeting, the pricing of a rate hike was virtually zero and indeed, pricing for an eventual rate continues to move further out into next year. The ASX futures rate market reflects the pricing for a .25% rate hike by end of 2019 having moved from likely to highly unlikely.


Lowe Remains Upbeat

While the investor outlook around the RBA remains generally downbeat, Governor Lowe continues to display an optimistic tone in the bank’s monetary policy decision statements. This time around, Lowe highlighted the strength of the Australian economy which grew at an “above trend rate” over the first half of the year noting the strength in business conditions and the expectation that “non-mining business investment” will continue to increase. Furthermore, Lowe added that “high levels of public infrastructure investment are also supporting the economy, as is growth in resource exports”.

Additionally, Lowe also said that “Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to remain at a relatively high level”.

However, Lowe did acknowledge that issues remain within the domestic economy specifically where “household income has been growing slowly and debt levels are high.” Lowe also explained that “the drought has led to difficult conditions in parts of the farm sector”.

Lowe Comments On Mortgage Rate Rises

Referring to the increase in rates seen among some banks in the home lending sector, for now it appears that the RBA is not too concerned, at least not publicly, saying “money market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June”.

Commenting on the housing market, Lowe said that conditions have continued to weaken and credit growth has been slow, though not alarmingly so. Low explained that “this is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up in risk of household balance sheets”.

rba australia

2Q GDP In Focus

The market now awaits the latest domestic data with Australian 2Q GDP due tomorrow, expected to have declined to 2.8% on the annual reading from 3.1% last time and to 0.7% quarter on quarter, from 1% prior. Household consumption had been stronger in the March quarter though considering the weak August retail sales figure, it seems to have weakened again.

However, a weak 2Q GDP figure is likely to do little to adjust the RBA’s view at this point. The bank has been clear in reiterating its message that until obstacles in the economy such as weak household income high levels of household debt and weak core inflation improve, the policy is on hold. With this in mind, a weak print tomorrow shouldn’t do too much to fuel any further AUD downside.

Technical Perspective

weak core inflation

After breaking down through the rising channel that had framed price action since late 2016, the price is now challenging the May and December 2016 lows around .7155 which are currently providing support. Price has been moving in a falling wedge pattern over recent months suggesting the potential for a reversal higher so while the .7155 level remains unbroken, the likelihood of consolidation and a rotation higher remains intact with the .7503 (broken December 2017 low) the key level to watch.



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