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RBA asks lenders to loosen restrictions

Published October 2, 2019

by Nicholas Cork

The RBA did not disappoint the majority yesterday, reducing the official interest rate to an all-time low of 0.75% following on from weaker than expected building approvals earlier in the day. The AUD initially jumped to 0.6775 as the ‘buy the rumour, sell the fact’ came into play, but was short-lived as a test of 0.6700 was seen soon after. Overnight it saw a 10 year low near 0.6670 before edging back to 0.6700 on exporter demand. A clear break of 0.6670 technically would open up a test of 0.6500.

In an overnight speech in Melbourne the RBA Governor urged lenders to improve credit supply to the economy, intimating that lending standards have been over tightened in some cases. “The resilience of Australia’s financial system has steadily improved over recent times… Lending standards have also been strengthened, although in some areas the pendulum may have swung a bit too far. Lenders should not be so scared of making a loan that goes bad that they don’t provide the credit that the economy needs.”

Governor Lowe further added that “The economy has been through a soft patch recently, but we are expecting a return to around trend growth over the next year.” On the inflation target and fuller employment he noted that “We still expect to make progress on both fronts, but that progress is slower than we would like. Today’s decision will help.” He still appears quite wary of geopolitical uncertainties and the board in general noted that the possibility that a shock somewhere in the global system could lead to a “disruptive” repricing of risks. “As a central bank in a small open economy we have to take the world as we find it. While we might wish it were otherwise, we can’t ignore these global trends and their impact on our economy. So, the Board is watching these global developments.” The financial futures market has responded accordingly, implying a 60% chance that the RBA will cut rates again in November.

The global economy flashed clearer warning signs as a wave of data showed manufacturing slumping, exports falling and sentiment sliding. U.S. manufacturing unexpectedly fell to the lowest since 2009 with a reading of 47.8 against expectations of 50.1. US yields fell abruptly after the data, with 2-year and 10-year yields slipping around 15 basis points. The Chinese parade did not disappoint with a display of 16 DF-41 ICBM’s passing through Tiananmen square, and riots in Hong Kong took a turn for the worse with an 18 yo student being shot in the chest by police, and other police officers being aggressively turned on by rioters.
A lack of local data out today, however, all AUD crosses are lower to start the session and further selling cannot be ruled out if exporter demand dries up.