Weekly Report

The RBA kept its cash rate unchanged at the historical low of 2.50% as widely expected. The sequence of slowdown in Chinese growth, the drop in mining investments and the significant decline in commodity prices – all combined to Australian government’s budget consolidation – require the extension of the period of lower rates for some more time in Australia. This is the only way for the RBA to ensure a healthy structural shift from mining to construction, especially with Aussie being considered as overvalued by historical means. In his speech post-decision, the Governor Stevens reiterated that high AUD offers “less assistance achieving balanced growth in the economy”. Despite above-stated difficulties, the central bank data showed that the loose monetary policy and low borrowing costs sustain recovery through better lending and faster credit growth. The private-sector credit expanded by 4.7% y/y in May, thus recording the fastest growth since March 2009, the GDP grew 3.5% in Q1 from a year earlier, while the unemployment rate retreated to 5.8% after hitting 6.0% at the beginning of the year. In addition, the June data recorded 1.4% rebound in house prices (vs. -1.9% drop a month ago). Stevens pointed at signs of improvement in the labor market warning that “it will probably take some time before unemployment declines consistently”, while adding that the growth should stay “a little below trend over the year ahead”. Traders continue betting on lower RBA rates before the year-end.