- No one expects the Reserve Bank of Australia (RBA) to lift interest rates this year.
- Macquarie Bank sees the RBA holding rates steady until early 2020.
- It also thinks the RBA may not get to lift interest rates at all.
No one expects the Reserve Bank of Australia (RBA) will be lifting interest rates this year.
And an increasing number don’t think there’ll be any next year either.
Everyone is pushing back their expectations, predicting the RBA’s record period of policy stability — already 20 meetings long — will continue well into the future.
Macquarie Bank is among that group.
Indeed, after being one of the most hawkish forecasters just over three months ago, it’s now one of the most dovish, suggesting the RBA won’t be lifting interest rates until 2020 at the earliest.
“We have had a re-think of the likely course for Australian interest rates,” Macquarie says.
“Three months ago we pushed back to February 2019 the timing for when we thought the RBA would begin gradually lifting the cash rate. We are now changing our call.
“We now expect the RBA won’t need to lift the cash rate until early 2020, with the timing risks evenly balanced.”
Macquarie had been forecasting that the RBA would lift interest rates in August this year just over three months ago. But now it thinks won’t move rates until early 2020.
So what explains the relatively sharp and sudden change of view, particularly at a time when Australian economic growth is accelerating and unemployment falling?
Macquarie says its largely reflects that the Australian economy simply isn’t growing fast enough.
“At a high level, we are now of the view that prolonged monetary support will be necessary as the economy continues to adjust to a post-commodity boom world,” it says.
“The economy is gradually improving, supported by above-trend global growth. It’s just not improving fast enough.”
It points out that Australia’s unemployment rate is still around 5.5%, with wages growth sitting at just above 2%, indicating there’s still an abundance of labour market slack out there keeping wage pressures subdued.
Macquarie thinks it will take years, not months, before meaningful progress is made.
“We expect ample spare capacity in the economy to linger,” it says.
“It appears likely that it won’t be until 2020 that Australia’s unemployment rate will firmly have a ‘4’ in front of it.”
And given the evidence seen in other advanced economies with far tighter labour market conditions than Australia, Macquarie says it suggests Australia’s non-accelerating inflation rate of unemployment (NAIRU) level is lower than conventional estimates of around 5%.
The NAIRU is the level where wage pressures are expected to accelerate. The RBA currently thinks it’s around 5% in Australia. Many think it’s substantially lower, potentially around 4%.
No one will know the answer until wage pressures accelerate, but it’s not happening at present.
“The recent global experience has shown that jobless rates can fall below, in some cases well below, conventional estimates of ‘full employment’ without generating the same degree of wage and price inflation as in the past,” Macquarie says.
“If Australia follows a similar path, the unemployment rate could fall well into the ‘4s’ before genuine wage and price inflation emerges.”
Given that outlook, and the linkages between the two, Macquarie says Australian inflationary pressures are likely to remain subdued.
“Underlying inflation in Australia is currently close to 2%, which is the bottom of the RBA’s 2-3% target. Some might argue therefore that RBA tightening mightn’t be too far off given inflation is within reach of the mid-point of the target,” it says.
“The problem is that inflation in Australia has recently been significantly supported by high inflation for several government-administered items, particularly tobacco and utilities prices.
“Consequently, ‘core’ market determined inflation has been very low, running at just 0.5% year-on-year on the most recent estimates.”
Put bluntly, while the RBA’s preferred inflation measure is moving higher, it’s not been driven by market forces.
In the absence of an expected acceleration in wage pressures, or a sharp lift in productivity levels, Macquarie says it all points to slow progress in pushing underlying inflation back to the midpoint of the RBA’s 2-3% target.
“Over the medium-term, average CPI inflation approaching 2.5% is highly unlikely without average annual wages growth of 3-3.5%, assuming average labour productivity growth of around 1% or a little higher,” it says.
Outside of wage and inflation developments, Macquarie says recent weakness in Australia’s east coast property market also adds to the case for the RBA to sit on the sidelines.
“Falling housing prices and uncertainty about the outlook for housing activity and credit availability also gives the RBA reason to sit pat,” it says.
Macquarie is forecasting that national home prices will fall by around 4-6% over the next couple of years, led by a steeper decline in Sydney.
As for the risks to its new RBA forecast, Macquarie says they’re evenly balanced.
“A much faster-than-expected fall in the unemployment rate and a higher terms of trade would increase the chances of a rate rise earlier than our base case,” it says.
“The chances of a later rate hike, or no rate hike, would rise if China’s deleveraging or domestic housing market developments become disorderly, or if by 2020 the US economy slows much faster than we expect.”
As Macquarie suggests, there’s still a small risk that the next move in the RBA cash rate will be down, not up.
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