Goldman Sachs now thinks that it will be months — not years — until the RBA hikes rates.
Not in 2018, or later. This year.
That’s the newly-minted forecast offered by Andrew Boak and Bill Zhu from the Goldman Sachs Australian economics team, who think the RBA will lift the cash rate for the first time since 2011 come November 7 this year.
Yes: in Goldman’s opinion, a Cup Day hike is a goer.
The premise behind the call is simple. Financial imbalances are building, RBA governor Philip Lowe places a great deal more weight on financial stability risks, and macroprudential policies to cool rampant investor activity in Australia’s housing market may not work.
Here’s Boak and Zhu’s view:
Financial imbalances in the Australian economy — in particular, acceleration in prices and speculative activity in the property sector — have intensified, and the RBA’s new Governor has confirmed a shift in the Bank’s reaction function to be both more responsive to these imbalances and less sensitive to low inflation. To date, several years of macroprudential initiatives have been the “first line of defence” against these imbalances; however, Governor Lowe is on record cautioning that macroprudential approaches “may be less than fully satisfactory”, and in our view it is likely that alternative approaches are now being seriously entertained.
“Alternative approaches” — rate hikes, in other words, and not just one, but many, says Goldman. They add (emphasis added):
We have long believed that financial markets are underestimating the probability of the RBA commencing a tightening cycle in 2017, having previously described a hike by November as a 40% chance. While this previous assessment did implicitly factor-in the RBA’s concerns around financial stability, the analysis in this note has strengthened our conviction that these concerns will have a greater influence in future policy deliberations. Overall, against the backdrop of a transformational positive income shock, a closing output gap, and upward transition point for inflation, financial imbalances warrant the RBA “leaning against the wind”.
We have pulled-forward our forecast start of the RBA’s tightening cycle to November 2017 and now expect two rate hikes in 2018, and three subsequent increases in 2019 to take the cash rate to 3.0% by 2020.
Three percent. 150 basis points higher than where the cash rate currently sits.
That’d arguably leave it slightly above what some now deem to be its neutral level. Modestly tight monetary policy — a far cry from the easy policy settings currently being enjoyed by borrowers.
Boak and Zhu admit their call is at the “hawkish extreme of consensus expectations”. However, they warn that should financial imbalances worsen, the RBA may hike even more.
“All things equal, should financial imbalances intensify further over the coming years, there is a strong case that a more aggressive policy response will be required,” they say.