AUD dips despite the expected hold on rates from RBA

The central bank held its benchmark interest rate steady at a record low of 1.5 per cent at its April board meeting on Tuesday, in line with the forecast in an AAP survey of 12 economists.

"The RBA can't cut rates for fear of further fuelling an overblown housing market, and the RBA can't hike rates due to fear of depressing an already tepid domestic economy", said Matthew Peter, chief economist at Brisbane-based QIC, which has A$74 billion in assets under management.

Speaking on growth in household income, Governor Lowe said that it was still outpaced by growth in household borrowing used largely to purchase housing.

In recent weeks, financial regulators have tightened the screws on mortgage lending, while Australia's biggest banks have even raised interest rates for homebuyers.

"Lenders need to ensure the serviceability metrics they use are appropriate for current conditions".

Last week, the Australian Prudential Regulatory Authority (APRA) asked banks to limit the amount of new interest-only loans.

The Reserve Bank of Australia (RBA) held its cash rate, as expected, at a record low of 1.5 percent following two easings past year, seeing moderate economic growth.

The cash rate is likely to remain on hold for the foreseeable future, with Lawless predicting the RBA won't increase it or decrease it for "at least for the remainder of the year".

The markets reacted negatively to the RBA statement and to Governor Lowe's comments and sold off the Australian dollar. Safe haven assets such as the yen and gold were some of the best performers in a broadly risk averse environment in the markets today, as investors were being cautious ahead of major risk events later in the week.

The decision to stay on hold was widely expected by economists, and the Australian dollar was largely unchanged at 75.93 United States cents after the statement.

After hitting a high of 76.15 United States cents following the release of better than expected February trade data on Tuesday morning, the currency fell to 75.78 U.S. cents when the RBA's statement was published.

The Aussie Dollar was also hit by Chinese data which crystallised negative sentiment concerning Iron Ore, Australia's premier export, after it showed stockpiles in China reaching a record surplus levels.

One possibility is that the RBA will announce targeted measures to stem mortgage lending; few expect a change in interest rates. A year out, the Shadow Board members' confidence that the cash rate should be held steady equals 16% (down from 17% in the previous three months), while the confidence in a required cash rate decrease has waned from 7% in March to 4% and in a required cash rate increase grown from 76% to 81%.

"We will want to see an improvement here before we can be confident that growth in the overall economy is strengthening".

Markets had priced for the cash rate to remain steady, with the ASX 30 day interbank cash rate futures market giving a 98 per cent chance of "no change" at 3 April 2017. Growth in rents is the slowest for two decades.



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