The latest RBA’s decision to maintain its firmly neutral stance by holding the official cash rate at the historic low of 1.5% is well within our and market expectation. It is the 14th consecutive hold since the RBA made its last move, a 25 basis point cut in August 2016. In this meeting, the RBA failed to provide any ammunition to interest rate hawks or new impetus to those bullish on the currency. They expressed concern on the value of the Australian dollar (AUD) and its potential impact on the economic growth, employment and inflation. The decision saw the AUD/USD dipping below 0.78. Besides, we found the yield differential or the spread between the Aussie and US 10-year bond yield narrowed to 51 basis points.

Judging from the latest RBA’s statement, we continue to maintain our view of no change to the policy rate in 2017 and until 1H2018. The RBA could possibly turn hawkish sometime towards the end of 2017 or early 2018. Should that happen, we can expect a 50bps rate hike in 2H2018, which will then reverse the rate cuts of 2016 and take the real cash back to zero. And after a 50bps rate hike, we expect the RBA to sit tight in 2019 as the high household debt impact will start to kick in.

• In line with our and market expectation, the Reserve Bank of Australia (RBA) maintained its firmly neutral stance, holding the official cash rate at the historic low of 1.5%. It is the 14th consecutive hold since the RBA made its last move, a 25 basis point cut in August 2016.

• We found that the RBA has failed to provide any ammunition to interest rate hawks or new impetus to those bullish on the currency. They expressed concern on the value of the Australian dollar (AUD) and its potential impact on the economic growth, employment and inflation. The decision saw the AUD/USD dipping below 0.78. Besides, we found the yield differential or the spread between the Aussie and US 10-year bond yield narrowed to 51 basis points.

• Judging from the latest RBA’s statement, we continue to maintain our view of no change to the policy rate in 2017. With wages having grown at a lacklustre pace, any sudden or premature increase of interest rates risks derailing the economy with the risk of the high household debt levels.

• Besides, this economy is among the most exposed to swings in raw material prices, particularly those of iron ore – a key export. The correction in iron ore prices is well under way now as speculative money moves out and as fundamentals weaken in the face of oversupply and winter restrictions on Chinese steel mills that will hurt ore demand.

• With the Chinese authorities introducing a series of winter restrictions in the steel industry in order to improve air quality combined with the efforts to slow aggregate demand and the impact from a reduced credit impulse, a slowing housing market and less expansionary fiscal policy suggest that commodity prices, in particular metal prices, could face a more uncertain time.

• The combination of renewing concerns over the outlook for raw materials prices and rising debt levels among Australian consumers could easily lead to a situation, in the coming months, where one can begin to abandon any ideas of an interest rate hike from the RBA anytime soon. For the RBA to turn hawkish, it could possibly happen sometime towards the end of 2017 or early 2018.

• We reiterate a no change in the policy rate for 2017 and until 1H2018. Should the RBA turn hawkish, we can expect a 50bps rate hike in 2H2018. If that happens, it will reverse the rate cuts of 2016 and take the real cash back to zero. And after a 50bps rate hike, we expect the RBA to sit tight in 2019 as the high household debt impact will start to kick in.

Source: AmInvest Research - 4 Oct 2017