Published: Thu, August 03, 2017
Markets | By Terence Owen

RBA Keeps Policy Rate Steady

RBA Keeps Policy Rate Steady

The central bank's monetary policy statement is due 12:30pm HK/SIN.

Reserve Bank of Australia Governor Philip Lowe said on Tuesday the bank board had chose to leave the cash rate at 1.5 per cent, where it has now been for 12 months.

Higher commodity prices, weak USA dollar, and the lingering belief that RBA might turn hawkish with its policy, are what keeping the Aussie strong.

A strengthening exchange rate, Dr Lowe warned, "would be expected to result in a slower pick-up in economic activity and inflation than now forecast".

On next week BoE policy meeting, CACIB doesn't expect any policy changes from the BoE and suspects that support for a rate hike at the MPC has waned after the departure of Kirstin Forbes in June.

In recent months, mortgage rates have been edging higher, especially for investors and interest-only loans.

The Dow Jones was up 34 points but USA tech stocks dragged the broad S+P 500 down 0.1 per cent thanks to Amazon's weaker than expected results on Thursday night. While some economists might argue high iron ore and coal prices justify a stronger Aussie dollar, the reality is mining companies aren't going to use the windfalls to invest and hire Down Under.

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RBA last cut rates in August 2016, when it chose to trim 25 basis points to avoid the risk of deflation.

Inflation is expected to pick up gradually as the economy strengthens.

Indeed, at a recent speech at the Anika Foundation Luncheon in Sydney, RBA Governor Philip Lowe said that "the persistent slow growth in wages is creating a challenge for central banks".

The economy is forecast to grow at an annual pace of around 3 percent over the next couple of years.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through. In some other markets, prices are declining.

They're expected to show continued solid jobs growth in the USA with 180,000 new jobs created in July and a fall in the unemployment rate, coupled with subdued wages growth. The weakness remains household debt - at a record 190% of income and among the world's highest - which is still outpacing income growth. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry". 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.

RBC capital markets are bullish the Aussie versus the Pound as, "Absent any shift in rate expectations, our default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low".

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