Expectations for RBA interest rate hikes continue to wither

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Expectations for interest rate increases from the Reserve Bank of Australia (RBA) continue to wither.

As seen in this chart from Capital Economics, financial markets are now uncertain as to whether the RBA will lift rates at all next year, a view in stark contrast to that seen just a few months ago when close to two 25 basis point rate hikes were priced in.

Source: Capital Economics

A series of weak retail sales, wage and inflation reports have seen markets understandably question whether rate hikes are necessary given the current state of the economy.

And while the RBA is still expected to begin lifting interest rates in the first half of 2019, at least based off the collective view of traders, Paul Dales, chief Australia and New Zealand economist at Capital Economics, says the delay could be even longer.

“Recent comments by Governor Lowe about the outlook for monetary policy all but confirmed that the RBA will leave interest rates at 1.5% at its final policy meeting of the year on Tuesday 5th December, and probably for a good while after that too,” Dales says.

“Indeed, if GDP growth stays below potential and inflation falls short of the RBA’s 2-3% target as we expect, rates will probably remain at 1.5% for all of 2018 and most of 2019.”

In a speech delivered last week, Philip Lowe said there was not a strong case for a near-term move in interest rates given “continuing spare capacity in the economy and the subdued outlook for inflation”.

He added that if the Australian economy continues to improve as the RBA currently expects, “it is more likely that the next move in interest rates will be up, rather than down”.

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