- Australian wage and inflationary pressures remain weak, making it harder to justify rate hikes from the RBA.
- The NAB, up until recently one of the most hawkish forecasters in Australia, no longer sees the RBA lifting official interest rates this year.
- It now sees the first rate hike from the RBA arriving in May 2019, largely in line with current market pricing.
The National Australia Bank (NAB) no longer sees the Reserve Bank of Australia (RBA) lifting official interest rates this year, continuing the pattern seen among major bank forecasters in recent months.
Like those who have pushed back the expected timing of a RBA rate hike before him, Alan Oster, chief economist at the NAB, says the decision was driven by uncertainty as to when Australian wage and inflationary pressures will lift.
“We have delayed the timing of when we expect the RBA to start a gradual rate hiking cycle,” Oster said in a statement released on Monday.
“The change reflects the fact there is no sign yet of stronger wages growth and unemployment has been stuck around 5.5% for the best part of a year.”
As opposed to his previous view that the RBA would begin to lift official interest rates in the final quarter of this year, Oster now says liftoff will likely begin in the middle of 2019, depending on upcoming economic data.
“We expect once the tightening cycle starts, further rate increases will be very gradual,” he says. “We are now expecting the first move to be in May 2019, with the next move after that not until November 2019.”
However, even with the delay, he says there’s still a risk that wage and inflationary pressures won’t lift by as much as he and the RBA expects, an outcome that could see the cash rate left at current levels even longer.
“We still expect the economy to strengthen, leading to a declining unemployment rate. This should eventually translate into stronger wages growth and give the RBA confidence that inflation will track back to its 2.5% target,” he says.
“However, we acknowledge there is considerable uncertainty around the timing at which wages growth will strengthen, and the time of the RBA’s next move will remain highly data dependent.”
Last week, the ABS released data on Australian hourly pay rates, revealing wages excluding bonuses grew by a paltry 0.5% in the three months to March, leaving the change on a year earlier static at 2.1%.
Private sector wages grew even slower over the year, meaning real wage growth for the vast majority of Australians went backwards once inflation was taken into consideration.
Australian unemployment also rose to 5.6% in April, according to separate data from the ABS, taking it further away from the 5% level where wage pressures are expected to build.
Earlier this year, RBA governor Philip Lowe stated that annual wage growth of around 3.5% would likely be required to lift underlying consumer price inflation (CPI) to the mid-point of its 2-3% medium-term target.
Currently, underlying inflation sits at just under 2%, explaining why, along with increased focus on financial stability risks from the housing market, the RBA hasn’t increased official borrowing costs since late 2010.
With the NAB pushing back the expected timing of a RBA rate hike, it means that all four of Australia’s big four banks now see the cash rate remaining at 1.5% throughout 2018.
Westpac Bank doesn’t see the RBA lifting rates until 2020.
On current form, rather than being the outlier, its forecast may soon become consensus should wage and inflationary pressures not begin to show signs of stirring.
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