TD Securities just ditched its call for RBA rate hikes this year

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  • TD Securities has abandoned its call for RBA rate hikes this year.
  • It says recent economic data has been insufficient to “move the needle for the RBA”.
  • Most economists, and financial markets, don’t see the cash rate increasing until the middle of 2019.

Like so many forecasters before them, TD Securities no longer sees the Reserve Bank of Australia (RBA) lifting official interest rates this year.

“The sound of rate hike capitulation has been deafening, and we reluctantly add to the noise,” says Annette Beacher, Chief Asia-Pacific Macro Strategist at the group.

“While we retain our ‘glass half full’ stance on the economy, the data flow has been insufficient to move the needle for the RBA, and a rate hike by year end is difficult to deliver.”

Rather than starting in the second half of this year, Beacher says the RBA is now likely to begin the process of normalising policy from the middle of 2019.

“Our base case looks for two rate hikes in 2019, May and November, for a cash rate of 2% by end-2019,” she says.

“Only significant upside surprises to core CPI and wages could bring forward this timetable at this juncture.”

While she, like so many others, has pushed back her forecast for rate hikes, Beacher doesn’t believe that the cash rate will remain at this level indefinitely.

“We remain of the view that broad-based employment-generating economic growth and sky-high household debt levels do not justify keeping the cash rate indefinitely at a record low 1.5%,” she says.

“We also do not subscribe to the burgeoning theme of a bank-led credit crunch derailing the economy.”

According to data released by CoreLogic, Australia’s median home price fell for an eighth consecutive month in May, leaving the decline from the recent cyclical peak last year at 1.1%.

A sharp decline in home loan lending to investors, along with a slowdown in housing credit growth, has undoubtedly been a factor behind the recent weakness, reflecting the introduction of tighter lending restrictions on interest-only mortgage lending introduced in March last year.

Some analysts believe that tighter lending limits based on income and debt levels could exacerbate the recent slowdown in housing credit, placing further downward pressure on house prices.

Given housing is the largest store of wealth for most Australian families, recent declines have seen some warn that it could impact household spending levels, weighing on economic growth, employment and inflation.

With recent Australian wage and inflation data remaining weak, all four of Australia’s big four banks — CBA, Westpac, ANZ and the NAB — don’t see the RBA lifting official interest rates this year.

Westpac doesn’t see a move in rates until 2020 at the earliest.

Financial markets, based off current OIS pricing, aren’t fully priced for a 25 basis point increase in the cash rate until the second half of 2019.

The RBA hasn’t increased the official cash rate since late 2010.

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