RBA need to hold rates low for long

Reserve Bank of Australia (RBA) has kept hold steady today at 2.25%, however capital expenditure and lower government spending indicates that rates need to be kept low for long time.

• Lower commodity prices has hit the economy hard. Iron ore, coal prices maintain downside bias. After years of increased private spending in mining and construction the boom has turned into a bust over slowing economic growth in China.
  
  
• With China consuming close to 50% of global supply in these commodities, prices might not turn for good in very long time. Chinese officials are still working hard for a soft landing in the economy rather than an abrupt one.

Moreover latest data points that public sector investments and constructions are continuing slow down since 2009.

• Public construction work has fallen close to lowest levels in a decade. Public sector building construction has fallen below 1% of GDP.
  
  
• Australian government is projecting to reduce deficit to below 1% of GDP from current around 3%. This means more austerity of balanced budget.

With contractionary fiscal policies and slower private sector spending, house hold sector growth alone will not be sufficient to keep the GDP buoyant.

RBA has fewer options than to keep rates low for long. As a net result Aussie will remain under pressure from rising dollar and higher yielding currencies such as NZD.

Aussie is trading at 0.768 against dollar and 1.018 against Kiwi. To note Aussie has fallen to record low against Kiwi.