Australia holds key rate as prospect of hikes remains distant

Australian Dollar outlook

Markets aren't pricing in a rate increase for at least another year, according to bets by swaps traders. The kiwi dollar drifted lower overnight and "we doubt it will have enough momentum to break through those levels today (unless the RBA dramatically surprise), with markets waiting for direction from the RBNZ later this week".

The Reserve Bank of Australia (RBA) ended its August policy meeting on Tuesday with rates held at a record low of 1.50 percent, and showed every intention of keeping them there.

The heads up is aimed at making sure the lower than expected CPI reading doesn't see an outbreak of speculation about a slowing economy and increase the small but growing belief that an interest rate cut might be needed rather than an increase. Keep in mind that this was the first month in which the United States imposed tariffs on China imports.

The bank will have more on its forecasts in Friday's third Statement of Monetary policy for 2018 but the statement yesterday indicates that apart from inflation there won't be too much of a change. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets.

"Three-year fixed rates for investors have increased by 10 basis points and discounted variable rates are up 40 basis points for investment loans", he said. "That was an improvement on the previous call of 5.25%, but still a glacial decline from the current 5.4%".

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"This is an important difference, with Australia's faster population growth being one of the reasons our economy has experienced higher average growth than many other advanced economies", Dr Lowe said.

'The central forecast is for inflation to be higher in 2019 and 2020 than it is now'. Therein contained the usual blue-sky analysis of the Australian economy, while touching on the various local and global risks - primarily in the shape of concerns around private debt levels and trade-war fears. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

ANZ's Quick Reaction Australia release stated that the tone of the RBA's release remained positive. Telstra shares suffered yesterday and played a big part in constraining the market, but it was the materials space that can take the lion's share of responsibility for the ASX's declines, falling 1 per cent amid selling pressure in commodities markets. This is also a factor for future interest rates, as the Reserve Bank of Australia has struggled to raise rates in the face of declining house prices.

"The low level of interest rates is continuing to support the Australian economy", Dr Lowe said in the final paragraph of the statement." urther progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual".

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