The RBA cash rate target has been maintained again at 1.50%. It is now the 16th consecutive month in a row that the rates have been held at this level. It has also been since 2010 that the rates have not been increased.
At this rate level, we cannot consider that the housing market, one source of issue, will be soon cool off. On top of that, markets have strong expectations that rates will remain on hold until at least 2019.
Yet, economic conditions look mixed. The low inflation and the low wage growth are preventing any rate hike in a near future despite forecasts from the Australian central bank. The RBA Governor mentioned that debt levels are high. Is it possible that this is actually the main reason for holding rates so low? We could hardly believe it. The era of free money has created, and is still underpinning bubbles, in all asset-class. Raising rates may trigger a massive bubble burst. We note that the Australian debt levels went from 15% to 45% of the GDP since 2009 (more sustainable than most of the G10 countries).
The Aussie is getting lower against the greenback and will likely continue to do so. The RBA will likely follow major central banks and not lead the move of monetary policy normalisation. This is why we believe that the Aussie has some more downside room within the medium-term.