As was widely expected, the RBA kept rates on hold at its December meeting. The bank’s headline cash rate has now sat unchanged at record lows of 1.5% since August 2016 when the bank last adjusted rates with a reduction of -0.25%.
The statement was little changed from last time around and gave very little to be excited about as the RBA continued to highlight risks from both external factors, such as lower global growth due to trade uncertainty and domestic factors, such as low household income and high levels of household debt.
While the bank maintains that a gradual increase in inflationary pressures over the coming years will likely warrant a rate hike it said that it does not want to tighten policy prematurely and risk stalling progress within the economy.
Concerns Around Tighter Lending Standards
The need for policy stability was especially high given the bank’s concerns around tighter home loan lending standards. RBA governor Lowe explained:
Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend.
He also added:
The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualized pace of 5–6%.
However, Lowe was keen to point out that he is not concerned about a credit crunch situation occurring, saying:
Mortgage rates remain low, with competition strongest for borrowers of high credit quality.
Economy Expected To Continue To Grow
Away from the housing market, the comments were more enthusiastic with the RBA chief saying:
With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely.
Lowe said of the broader business conditions in Australia: “The Australian economy is performing well” citing an increase in non-mining investment and a solid increase in public infrastructure spending and exports as a result of a weaker AUD.
However, Lowe did add the caveat that “one continuing source of uncertainty is the outlook for household consumption.”
Accounting for over 50% of the Australian economy, this an important issue and Lowe explained:
Growth in household income remains low, debt levels are high and some asset prices have declined.
Switching back to a more positive note, Lowe went on to praise the recent pick up in wages which he forecasts will continue, saying:
The stronger labor market has led to some pick-up in wages growth, which is a welcome development…The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.
Technical Perspective
After rallying off the .70 level base, AUD has seen a sharp reversal with price currently forming a large bearish engulfing candle on the daily charts. There is plenty of resistance overhead for AUD/USD with key Fibonacci retracements from the year to date high sitting alongside major structural resistance from broken prior lows.
To the downside, the main level to watch is the .7010 base, a break of this level will be a strong bearish signal for AUD/USD bringing the 2015 lows into focus.