- Financial markets and many economists no longer see the RBA lifting interest rates in 2018.
- Macquarie Bank is the latest to join this list.
- It now sees the RBA lifting rates in early 2019, later than its prior forecast for August of this year.
Expectations for rate hikes from the Reserve Bank of Australia (RBA) this year continue to fall by the wayside.
Like financial markets and many economists before them, Macquarie Bank is the latest to push back its forecast for the RBA’s first rate increase since late 2010, seeing liftoff occur in early 2019 rather than its previous forecast for August of this year.
“The primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target,” it says, pointing to three specific factors to explain it’s change of view.
The first of those is what’s been seen in other major advanced economies since the global financial crisis when it comes to wage pressures.
“The experience in other advanced economies in recent years is that unemployment rates can fall to low levels without much pick-up in wages growth or inflation,” it says.
“While some of this effect may be transitory, Australia’s unemployment rate remains at 5.5% and noticeably above ‘full employment’.”
Many believe Australia’s unemployment rate will need to fall to 5% or lower before it will lead to a meaningful pickup in wage growth and inflation.
Adding to the case for the RBA to sit on the sides a while longer, Macquarie says few expect inflation to pickup strongly in the years ahead.
“After two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer,” it says.
The RBA is currently forecasting that underlying inflation, its preferred measure of cost pressures, won’t push back towards the middle of its 2-3% target band until 2020 at the earliest.
Along with an expectation that wage or inflationary pressures will build significantly any time soon, it says a recent slowdown in Australia’s housing market, specifically in Sydney and Melbourne, means there is now less urgency for the RBA to act by lifting official interest rates.
“Housing has settled,” Macquarie says.
“The source of much angst for the RBA — fast growth in housing prices in Sydney and Melbourne — has eased. Investor activity in the housing market has subsided significantly and housing prices have broadly flattened out.
“There appears little danger at this stage of a reacceleration in housing price or credit growth.”
While those factors, in Macquarie’s opinion, will see the cash rate remain at 1.5% throughout this year, it says “by early 2019 it should become apparent that growth and inflation are on a path that can afford the gradual removal of monetary policy support”.
“Government spending growth is already very strong and providing significant support to overall growth,” it says.
“Given a bit more time, it is likely that private demand growth will also solidify at healthy rates. If this plays out as we expect, both arms of macro policy [fiscal and monetary] won’t need to be pushing so hard in the same direction.”
Financial markets currently attach a 45% probability that the RBA will deliver a 25 basis point rate increase by the end of this year, a view that Macquarie describes as “about right”.
That view moves to 100% by May 2019.
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