Europeans can't understand why the RBA is talking about raising rates

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The Reserve Bank of Australia (RBA) thinks the next move in official interest rates is likely to be up rather than down, underpinned by the view that stronger economic growth will help to lower unemployment and boost employee wages, leading to a pick-up in inflationary pressures.

Not everyone shares that optimistic view, including those in Europe.

That’s the feedback received by Bill Evans, Westpac’s chief economist, following meetings held with central bankers, real money managers, hedge funds and corporates in Europe and London over the past fortnight.

From a broad perspective, Evans says there’s quite a bit of pessimism, and surprise, that the RBA sees the need to signal the next move in the cash rate is likely to be higher.

He elaborates:

There was considerable curiosity as to why RBA would maintain the line about rates. Investors noted their views around the global environment and tightening Australian financial conditions and, in particular, housing.

Investors could not understand why the RBA would be signalling eventual rate hikes with housing weakening and financial conditions tightening. The rise in BBSW (bank bill swap rate) and the common assessment that USD shortages outside the US were likely to intensify at the expense of AUD funding was expressed. Others pointed to tightening liquidity in the Australian markets and rising repo rates.

For Australia, much depended on the global outlook. Those expressing the view set out above were not confident and were particularly curious about the RBA’s bullish 3.25% growth outlook for 2019.

Unlike a majority of other forecasters domestically, Westpac shares the scepticism conveyed by those in Europe, reaffirming the view that the RBA is unlikely to be in a position to raise the cash rate until 2020 at the earliest.

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