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Cash rate remains on hold

Michael Witts
Wednesday, October 04, 2017

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by Michael Witts

What was discussed at today’s RBA meeting? Were there any major differences compared with last month’s statement?

While the length of the statement from the RBA was longer than usual (one and a half pages versus just over one page previously); the sentiment and message from the RBA was largely unchanged compared with previous months. The main messages were:

  • Improving global growth;
  • Global inflation and wages growth not an issue;
  • Australian economy tracking largely as expected;
  • Strong employment growth;
  • Pick up in non-mining investment
  • Relative strength of AUD not helping;
  • Housing market starting to cool in main hot spots; and
  • Interest rates on hold.

What are the major concerns for the RBA?

The RBA noted that the high level of debt in China was an area of medium term concern.

Domestically, the high and rising level of debt in the household sector is going to be a ongoing constraint on consumer spending. This position is compounded by the slow growth of wages currently and in prospect.

The RBA again has called out both the level and recent trend of the Australian dollar as a factor that will lead to a slower level of pick-up in economic activity and inflation than previously forecasts. This would tend to suggest that the RBA on hold well into 2018.

What is ING Direct’s outlook for the economy, the Aussie dollar and interest rates?

While broadly agreeing with the RBA, we would suggest that the international outlook will drive stronger domestic growth than is currently factored into forecasts. This will likely see a stronger USD and lower AUD; this will benefit the domestic economy through the exchange rate linkages.

Against this background we would suggest that the RBA may well be looking to adjust the cash rate over the June quarter of 2018. If , and when , the RBA starts to move rates higher the peak in rates will be lower than previous up cycles, and will also be more gradual or drawn-out over time compared with the recent past.

It is clear that the slow down in the housing market that had been apparent in other markets over the past say 18 months, is starting to have an impact on the central Sydney and Melbourne markets. Auction clearance rates are hovering just below 70% and price pressures appear to be easing.

Published: Wednesday, October 04, 2017

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