Australian dollar hits three-week low as RBA backs mortgage crackdown

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The Australian dollar fell to a three-week low after the country’s central bank used its April policy meeting to back recent steps by regulators to crack down on risky lending practices.

The Reserve Bank of Australia decided today to leave interest rates on hold, as expected, but also used its policy statement to throw its support behind macroprudential measures recently announced by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) targeting interest only home loans.

The dollarydoo was down 0.5 per cent at $0.7565, its lowest point in three weeks. The currency had been in better shape earlier in the Asian session after data showed the nation posted its second-biggest nominal trade surplus on record, which exceeded the average of economists’ expectations.

The RBA also used its policy statement to deliver a more downbeat assessment of the domestic labour market, where it said some indicators had “softened”. Previously, it had described indicators as looking “mixed”.

Sally Auld at JPMorgan said the central bank’s commentary on the domestic economy was not as upbeat compared to a couple of months ago, “suggesting the distribution of risks” in the RBA’s February’s Statement of Monetary Policy forecasts may be shifting to the downside. She continued:

All else equal, this will make it more difficult for the central bank to engineer the desired lift in core inflation.

On housing, the RBA note that recent macro-prudential initiatives will help address financial stability risks. This will potentially give the RBA flexibility on rates, should it be required.

Annette Beacher at TD Securities is still taking a more hawkish view of the situation:

The APRA/ASIC announcements are likely to be too little, too late and poorly targeted. The acceleration in house price inflation and record household debt were well entrenched before the recent pickup in interest-only lending. As we doubt these jawbone policies will curb banking practices we still look for a higher cash rate by year end.

Ivan Colhoun at National Australia Bank said:

The RBA Governor has made clear in previous public pronouncements that while the Bank would like to see the unemployment rate come down more quickly and inflation return to target more quickly, the Bank has had concerns that a further cut in interest rates could induce some households to borrow beyond their means. The Bank was thus prioritising its concerns about household balance sheet and financial stability risks. The Governor has also noted that if the unemployment rate were to begin to rise, then the Bank could reassess the question about the time taken to return to the inflation target – and implicitly would be more likely to reduce interest rates.

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