RBA unlikely to follow the Fed by lifting rates

A leading economist has outlined the positives of a US rate hike for Australia, including downward pressure on the Aussie dollar.

Last week the US Federal Reserve raised its Federal Funds target interest rate from a range of 0.25-0.5 per cent to 0.5-0.75 per cent. The Fed noted the stronger US labour market, moderate economic growth and rising inflation.

According to AMP Capital chief economist Shane Oliver, the Fed continues to refer to only “gradual” increases in interest rates and it's so-called “dot plot” median of meeting participants’ interest rate expectations is allowing for only three hikes in 2017.

“To the extent that the Fed’s interest rate hike signals a stronger US, it’s good for Australia,” Mr Oliver said.

“It doesn’t signal that the RBA will soon follow and hike next year though. With the Australian economy remaining weaker relative to its potential than the US and inflation running further below target, we remain of the view that the RBA will be cutting rates again in 2017 not hiking them,” he said.

Mr Oliver is one of a handful of economists, including Stephen Koukoulas, who believes that the RBA will actually lower rates again in 2017.

“I think the RBA will cut again, reluctantly, because they're worried about house prices, particularly in Sydney and Melbourne [where median house prices are at record highs of $1.06 million and $770,000 respectively],” Mr Koukoulas said.

“I think, maybe early in the new year (if we get another low inflation result at the end of January), if the labour market remains sluggish, the risk reward for the RBA is just to trim rates a little more, which might take a little bit of heat out of the Aussie dollar.”

[Related: 'RBA will cut again,' says economist]

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