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RBA Expected to Keep Interest Rates on Hold

The Reserve Bank of Australia is expected to keep interest rates on hold at its policy meeting today. The risk is the RBA adopts more upbeat views on Australian economic activity considering the solid growth in employment.

The RBA has kept its benchmark rates at a record low of 1.5% since August last year. Economic growth has appeared slightly sluggish. 

 

Last month, Australia reported gross domestic product for the first quarter rose 1.7% on year but economists have said growth would likely improve in the second quarter, as economic activity was hindered by Cyclone Debbie earlier in the year.

The RBA's is optimistic that the growth will increase to a little above 3% in the next few years. The central bank said the global environment has continued to pick up and improvements had been made in the domestic economy. 

According to RBA, the recent supervisory measures on the housing market should help address the risks associated with high and rising levels of indebtedness.

The housing market has been the challenge. If the RBA were to cut rates further, then the easier liquidity would drive property prices even higher.

The CoreLogic Hedonic Home Value Index, released yesterday it showed that in the April to June quarter, capital city dwelling values rose 0.8% on quarter and 9.6% on year.

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Rating of Australia’s Major Banks Lowered by Moody’s Investors Service

Rating of Australia's major banks were lowered by Moody’s Investor Service due to the surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.

In a statement released yesterday by Moody’s,  Australia And New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking were all downgraded to Aa3 from Aa2 as the risks associated with the housing market have risen sharply in recent years.

 

According to Moody’s, the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks. 

The Australian dollar fell as much as 0.5% following the announcement and was trading at 76.02 US cents at 6.37pm.

S&P Global Ratings last month downgraded the credit ratings of almost all of Australia's financial institutions on similar concerns about the risks of a property market downturn.

However, it spared the four biggest banks on the expectation of government support in the event of a crisis.

 

The combination of soaring house prices and stagnant wage growth has pushed the ratio of household debt to disposable income to 189% one of the highest levels in the world.

The Australian government has taken steps in recent months to cool the red-hot property market amid concerns that speculation in housing could ultimately hurt consumers, banks and the economy.

 

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Gold Moves Higher after Fed Raises Interest Rate

Gold broke a six-session losing streak, August gold slid to $1,272.70 after settling up $1,275.90 an ounce as consumer data was soft, retail sales and CPI posted declines of 0.3% and 0.1%, respectively. 

The Federal Reserve announces its benchmark rate, which is expected to increase by 25 basis points to 1.25 percent. The Fed is widely expected to raise interest rates by a quarter point to 1.25%, but there's still plenty of anticipation, as analysts will be focusing on the language in the rate statement and as well as the Fed's economic projections. 

The Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. A dovish message could pour cold water on a rate hike in September and boost gold prices. 

Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect gold prices. First, the Fed Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. 

 

With the US economy performing better in the second quarter, there's a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. 

Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. 

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