Saul Eslake: The RBA Won't Cut Interest Rates This Year

Saul Eslake

Saul Eslake, the respected chief economist at Bank of America Merrill Lynch, is going against much of the market to forecast the RBA will hold interest rates this year and then start raising them in 2016.

“The RBA will likely keep interest rates unchanged throughout 2015 despite the shift in market expectations toward the end of last year in favour of further rate cuts,” he said at a briefing in Sydney today on BAML’s themes for the Australian outlook this year.

Other prominent market economists, including Bill Evans at Westpac, are forecasting up to two rate cuts this year in response to a slowing economy. Paul Bloxham at HSBC forecast no movement in 2015.

Today a veteran finance journalist, known for his Reserve Bank connections, predicted a change in the RBA’s outlook and said there almost certainly would be a cut announced at its board meeting next Tuesday.

Eslake has given thought to what the other economists and commentators have said but says he still thinks the RBA won’t move this year.

Australia is in for another year of below trend economic growth this year but there is some light at the end of the tunnel, he says.

“We are now seeing more signs that the extended period of record low Australian interest rates is starting to have its intended effects,” Eslake says.

“Australia looks set to have a housing boom of sorts with over 200,000 (dwelling) commencements in 2015.

“And despite faltering business confidence, which we think has a large political aspect, there are indications of stronger capex and hiring in some other labour-intensive sectors such as transport, recreation and finance.”

Eslake also expects the Australian dollar to fall further against the US dollar, partly because the capital flows to mining are set to fall away.

“Given these indication that monetary policy, aided by a falling Australian dollar, is now beginning to have its intended results, we expect the RBA to resist market pressure to cut rates again and to remain on hold through 2015 ahead of what will probably be a couple of rate increases in 2016,” he says.

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