The OECD says Australia is expected to start lifting interest rates toward the end of 2018

  • The latest OECD economic outlook says Australia will start lifting official interest rates by the end of 2018.
  • At the same time wages will improve and inflation will rise.
  • The OECD says measures in the latest federal budget, including cuts in personal tax, expenditure control and revenue measures, will help deliver a reduction in the budget deficit.

Australia will start gradually lifting interest rates again toward the end of 2018, according to forecasts in the latest update to the OECD (Organisation for Economic Cooperation and Development) Economic Outlook.

The Paris-based think tank says the Australian economy will continue growing at a robust pace. It forecasts GDP of 2.9% this year and 3% next year. Unemployment is expected to fall this year to 5.4% from 5.6% and then to 5.3% next year.

“Business investment will pick up, with exports boosted as new resource sector capacity comes on stream,” says the updated economic outlook.

“Public infrastructure investment will also support growth. A stronger labour market and rising household incomes will sustain private consumption. Inflation and wages will pick up gradually.”

The Reserve Bank has kept cash rates at a record low of 1.5% since August 2016.

The OECD’s forecasts are at odds with an increasing consensus of Australian forecasters, especially given the recent small uptick in the unemployment rate. For example, NAB — one of the most hawkish rates forecasters — recently dropped its call for an increase in the RBA’s official cash rate by the end of this year. It now expects a rate hike in May 2019, largely in line with market pricing.

“Withdrawal of stimulus is projected to begin towards the end of 2018, as wage and price growth are expected to pick up further on account of a continued strengthening of activity and labour market performance,” says the OECD.

“The resulting boost to household incomes should mitigate risks associated with Australia’s very high household indebtedness.”

The OECD sees an easing in the Australian housing market as a positive.

“House price growth has slowed markedly and housing loan approvals have edged down, partly thanks to macro-prudential measures,” says he OECD.

“Regulators have taken steps to limit growth of investor lending and have discouraged loans with high loan-to-value ratios.

“Aggregate indicators of household financial stress are low, although some areas — mining regions in particular — remain a concern.

“Public debt in relation to GDP has risen in recent years, but remains relatively low and is projected to start falling given the government’s proposed goal to reduce the annual deficit by around 0.5 percentage point of GDP per year over the four-year budget horizon.”

The OECD points to the latest federal budget proposals, including cuts in personal tax, expenditure control and revenue measures, will help deliver a reduction in the budget deficit.

“The pace of deficit reduction is ample given projected growth,” says the OECD.

On the risk side, the OCED names global commodity markets, household debt, house prices and employment.

“The slowdown and rebalancing in China could be a larger drag on growth than expected,” says the OECD.

“High indebtedness of households remains a risk. Unexpectedly large corrections in house prices would reduce household wealth, and could cut consumption and damage the construction sector.

“The combination of strong employment growth and rising labour market participation raises questions about how much slack there is left in the economy and creates uncertainty surrounding when economic growth will translate into stronger increases in wages and incomes.”

The OECD forecasts on fundamental economic indicators:

Source: OECD

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