In line with our expectation, the Reserve Bank Australia (RBA) kept its official cash rate at its historic low of 1.5% for the 13th straight month. The reason for holding rates is driven by the strong dollar which will weigh on the economic growth, inflation and employment.

We feel the current low interest rates should continue to support the GDP. The high household debt and low wage growth will act as hurdles to growth despite a pickup in retail sales which could enjoy a limited upside. Meanwhile, we place a 30% chance for a rate hike in 2H2018 by 25 basis points and a 70% chance of no rate hike in 2018 as much will depend on how the GDP, inflation and financial stability craft out.

• In line with our expectation, the Reserve Bank Australia (RBA) kept its official cash rate at its historic low of 1.5% for the 13th straight month. The last time the RBA reduced its official cash rate was in August 2016 by 25 basis points.
• The reason for holding rates is driven by the strong dollar which will weigh on the economic growth and employment. Also the strong currency is putting a lid on the current low inflation to reach the 2%-3% target range. Furthermore, house prices are easing, especially in Sydney.
• We feel the current low interest rates should continue to support the GDP. We expect the policy rate to remain at current levels given that the high household debt and low wage growth will act as hurdles to growth despite a pickup in retail sales which could enjoy a limited upside. Basically, the RBA is stuck with the current rates.

• Meanwhile, we place a 30% chance for a rate hike in 2H2018 by 25 basis points. Much will depend on how the GDP, inflation and financial stability craft out. The risk for rates to remain unchanged throughout 2018 is still high, at a 70% chance.

Source: AmInvest Research - 6 Sept 2017