Australian dollar to suffer from low rates
Published on 21.02.2018 15:43

After flirting with US80c just last Friday the Australian dollar has pulled back sharply in the last 3 trading sessions towards the US78c mark which was buoyed on by yesterday’s minutes meeting from the reserve bank of Australia and a speech by assistant RBA governor Michele Bullock.

 

In the latest minus, the RBA noted that wage growth was still a major concern which was echoed BY Governor Philip Lowe who said last week that he would like to see wage growth tise to around 3.5 percent from the current 2 percent.

 

That wish was dealt a blow today after the release of the latest wage growth index which hit the market at 2.1 percent and clearly shows that a figure of 3.5 percent is some way off.

 

Until wages in Australia rise, some predict that the RBA will leave rates on hold.

 

"The bank expresses uncertainly over the future path of the participation rate, how much spare capacity exists in the labour market, how quickly any spare capacity might be eroded and how soon , and by how much , wages growth might pick up," noted JP Morgan chief economist Sally Auld

 

"While the RBA must be taking some comfort in signs of recent wage and inflation pressure in the US, it seems fair to posit that policy will be firmly on hold until the bank has greater confidence on the expected path of key labour market variables in Australia." She added.

 

Assistant RBA Governor Michele Bullock also sounded the warning bells yesterday in a speech at the Responsible Lending and Borrowing Summit that the new regulations due to be introduced by the RBA would hit some borrowers hard as they strive to refinance their current mortgage portfolios.

 

This may lead to bigger falls in the housing market that is currently underway which may also trigger a reduction in spending by the Australian consumer.

 

"Some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage. This third group might find themselves in some financial stress," Mrs Bullock said.

 

“Households with higher debt levels may also sharply curtail their consumption in response to an adverse shock such as rising unemployment or large falls in house prices, amplifying any economic downturn.” She added.

The material published in on this page is produced by the FIBO group companies, and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC; furthermore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Andrew Masters

Analyst

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