This analyst says the RBA looks set to hike interest rates, and far sooner than most people think

It’s been a while since we’ve seen a RBA tightening cycle. Hulton-Deutsch Collection / CORBIS / Corbis via Getty Images

Get ready, Australia.

The Reserve Bank of Australia (RBA) looks set to hike interest rates, and far sooner than what most people think.

That’s the view of HSBC’s Australian economics team, led by Paul Bloxham, who say that a rebound in economic growth will lead to a pickup in wage and underlying inflation in the coming quarters, paving the way for the RBA to hike rates in early 2018.

Yes, early next year.

“If, as we expect, by early 2018, growth is running at an above trend pace, underlying inflation is back in the 2-3% target band and wages growth is past its trough, the RBA may see little need to maintain its highly accommodative monetary policy stance, particularly given its ongoing concerns about the exuberance in the housing market,” the bank wrote in a note released today.

“We see the first hike as likely to arrive a bit earlier than the market is currently pricing.”

Helping to underpin a pickup in wage and inflationary pressures, HSBC says that annual GDP growth will lift to an above-trend 3.3% by the end of this year, a view bolstered by a swathe of strong economic data in recent months.

Source: HSBC

“Most of the timely indicators of domestic economic activity suggest that growth is set to pick up pace in coming quarters,” it says.

“Key amongst these indicators are surveyed business conditions, which are around decade highs, and employment growth, which has picked up recently with sufficient momentum to push the unemployment rate lower.”

That, along with an unusually-large increase in Australia’s minimum wage rate at the beginning of July, should lead to a modest lift in wage pressures.

“We expect wages growth to pick up modestly in the second half of 2017, due to a boost to the minimum wage and the impact that the lift in corporate profitability typically has on wages growth,” HSBC says.

“This should mean that domestic inflation is past its trough, and we see the underlying inflation measures lifting back into the bottom part of the 2-3% target band in coming quarters.”

On the elevated Australian dollar, a factor many point to as a reason why the RBA should leave rates on hold for a considerable period, the bank says that this merely reflects that commodity prices are increasing and that global growth is picking up — two factors that usually benefit Australia’s trade-exposed economy.

“Another concern has been that the Australian dollar has risen recently and that this could weigh on growth, by reducing export competitiveness and driving import substitution, and could also weigh on inflation. However, it is important to keep in mind that the increase in the AUD has been accompanied by a pick-up in the prices of Australia’s commodity exports, led by iron ore and coal, and a lift in global growth,” it says.

“Historically, it has often been the case that the first sign that local growth is set to pick up shows up in a higher Australian currency.”

In terms of the risk to its hawkish view, HSBC says it will hinge on what happens in the Sydney and Melbourne property markets.

“Our view partly hinges on continued expected concerns about the housing market,” the bank says.

“Although the RBA has been noting that there are ‘signs that conditions in the Sydney and Melbourne markets had eased somewhat’, the housing price growth in these markets is still running at double-digit rates year-on-year.

According to data released from CoreLogic earlier today, Australian house price growth stalled in August, seeing the annual increase in prices slow to 8.9%.

Source: CoreLogic

Prices in Sydney were flat over the month while those in Melbourne rose by 0.5%.

That took the gains in both cities over the past three months to 0.3% and 1.9% respectively, well below the levels seen earlier in the year.

Even with that slowdown, the median house price still rose by 13% in Sydney over the past year, while those in Melbourne grew by 12.7% over the same period.

While still a rapid pace, a factor HSBC says will likely see the RBA lift rates early next year, CoreLogic’s head of research Tim Lawless says the recent deceleration could, if history is a guide, see prices start to fall in both Sydney and Melbourne in the coming months.

“If the current trends continue, by the end of the year we could see dwelling values across Australia’s two largest housing markets, Sydney and Melbourne, trend lower as they move through their cyclical peaks,” he says.

“Historically, a negative shift in home values has followed every growth phase, so it’s reasonable to expect a period of moderate value falls following such a sustained period of strong capital gains.”

Suddenly, upcoming house price and lending data has become a whole lot more interesting. Even more so than usual.

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