- Australian cash rate futures are not 100% priced for a 25 basis point rate hike from the RBA until early 2020.
- UBS has just pushed back its RBA rate hike call into 2020. It previously saw the bank on hold until the second half of next year.
- It sees underlying inflation moving further away from the bottom of the RBA’s 2-3% target in the upcoming June quarter CPI report.
Traders, collectively, aren’t convinced the Reserve Bank of Australia (RBA) will hike official interest rates until early 2020, joining an increasing number of economists who think the same.
George Tharenou, Economist at UBS, has become to latest to join that list, predicting that continued weakness in underlying inflation, tighter lending standards, further declines in home prices and uncertainty over the trajectory of wage pressures will keep the RBA sidelined not only this year but in 2019 as well.
Previously, Tharenou had a 25 basis point increase in the cash rate penciled in for the second half of next year. However, after reviewing inflationary trends seen during the June quarter, he’s now pushed that call back to 2020.
“Our expectation of weaker underlying consumer price inflation (CPI), combined with our long-held view that tighter credit will likely see further weakening of housing ahead, as well as the relatively recent dovish shift on wages by the RBA, means that we now ‘officially’ see the RBA to hold until 2020, more dovish than the mid-2019 consensus and our prior view of steady rates until at least second half of 2019,” Tharenou says.
Despite what is likely to be a fuel-led surge in Australia’s June quarter CPI report, Tharenous says underlying CPI measures will remain weak, seeing the year-on year increase fall further away from the RBA’s 2-3% medium-term target.
“For key ‘underlying’ CPI — based on the average of the trimmed mean, weighted median and ex-volatiles measures — our survey shows a print of only 0.4% for the quarter, the equal lowest level since 2016,” Tharnou says.
“This drags the year-on-year rate to 1.8%, the weakest in a year and below the RBA’s…forecast of 2%.”
Tharenou also forecasts that core CPI — the average of the ABS trimmed-mean and weighted-median measures — will also moderate, pulling back from just shy of 2% in the year to March to 1.75% in the latest report.
As for the risks to his RBA call, Tharenou says they’re to the upside.
“Higher oil prices, combined with a lower AUD, are an upside risk to [both] current and future inflation,” he says.
“A material upside surprise on underlying CPI, around 0.6% for the quarter, as well as a further fall in the AUD are the key near-term risks to our new view.”
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