The RBA now thinks Australia’s economy will grow even faster, but financial markets are sceptical

Sean Gallup/Getty Images Sean Gallup/Getty Images

The Reserve Bank of Australia (RBA) reckons the Australian economy will continue to roar this year and next, suggesting GDP growth will average 3.5% per annum, above the already-optimistic 3.25% growth rate it saw just three months ago.

Crucially, that would leave GDP growth well above the 2.75% pace that many regard as being trend, the level of growth where unemployment and inflationary pressures are stable.

With growth expected to rollick along, it helps explain why the RBA also sees unemployment falling below 5% in 2020, and inflation returning to the midpoint of its 2-3% annual target.

Combined, it sounds like the bank is becoming more than glass-half-full about the prospects for the Australia economy, potentially paving the way for an earlier increase in interest rates than many currently expect.

However, the reaction of financial markets to the RBA’s November policy statement suggests they’re not entirely convinced.

The Australian dollar and Australian 2-year government bond yields — two asset classes that are sensitive to changes in rate expectations — have barely budged in response.

Here’s the AUD/USD 5-minute chart.

AUD/USD 5-Minute Chart

And a 5-minute chart of 2-year government bond yields.

Australia 2-year government bond yield. 5-Minute Chart

While there are some big market events ahead, including the US midterm elections later today, the lack of movement suggests there’s a degree of scepticism about the forecast changes flagged by the RBA.

They ain’t buying it, literally.

And, as seen in the tweet below, it’s not just markets that are a little perplexed about what exactly the RBA is thinking.

Like Bill Evans from Westpac, other economists expressed doubts about whether RBA’s expected growth trajectory is realistic.

“The upward revision to the RBA’s growth and inflation forecasts suggest that the Bank is moving closer to tightening policy. But we still think that the downturn in the housing market will result in slower growth before long and retain our forecast that the first rate hike will only happen by the end of 2020,” said Paul Dales of Capital Economics.

Shane Oliver of AMP Capital suggested the RBA is underestimating the headwinds facing the economy in the coming years.

“The RBA is underestimating the threat posed by slowing growth in China, tightening credit conditions and a negative wealth effect as house prices continue to fall, particularly in Sydney and Melbourne where we anticipate a top to bottom fall of 20% stretching out to 2020,” he said.

“As a result, and in contrast to the RBA, we see growth slowing to around 2.5-3% through 2019 as opposed to the RBA’s expectation for 3.5% growth which in turn will result in higher unemployment and keep wages growth and inflation lower for longer than the RBA is allowing.”

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