RBA: Dampening rate hike expectations - AmpGFX

The RBA has gone out of its way to damp down expectations that it will hike rates for some time; pointing to slack in the labour market, a higher exchange rate, retail competition intensifying as Amazon enters the Australia market, a subdued outlook for business investment, risk in the housing market and from household debt, and a weaker outlook for China and Australia’s terms of trade, explains Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“Meanwhile, The Australian economy is punching out some of the strongest broad-based activity numbers in some time.  Forward indicators of business investment and employment have accelerated, and inflation is set for a bump in the second half of this year on a surge in electricity prices and a jump in the minimum award wage. And the terms of trade are rising on renewed strength in Chinese commodity demand and a synchronized global economic recovery.  The Australian external balance has virtually disappeared; at a low in over 30 years.”

“While the Australian economy is gaining momentum, New Zealand economic growth has slowed. On a number of counts (external balance, political risk, housing markets, construction trends, commodity price trends) the AUD comes out ahead of the NZD. The RBNZ quarterly policy statement on Thursday is likely to try and emulate the RBA effort to damp down interest rate hike expectations and the exchange rate.  The AUD/NZD long run average is between 1.15 and 1.20, much higher than the current 1.075.  There are few reasons to argue why it should not already be back up there, if not higher.”