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‘Hawkish’ RBA outlook could signal early rate hike

‘Hawkish’ RBA outlook could signal early rate hike

The Reserve Bank has “surprised” the market with its “upbeat” economic outlook, which could be a “precursor to a rate hike in relatively short order”, according to ANZ Research.

ANZ Research said that Reserve Bank of Australia (RBA) governor Philip Lowe’s monetary policy statement, released following the central bank’s November board meeting, could be a sign of an earlier than expected cash rate increase.

The RBA board decided to hold the cash rate at 1.5 per cent, with Mr Lowe attributing the RBA’s decision to below-target inflation and labour market conditions.

However, Mr Lowe noted that the Australian economy is “performing well”, pointing to the 3.4 per cent increase in GDP over the year, and the drop in the unemployment rate, which fell to 5 per cent.

As a result, the RBA revised its forecast for economic growth in 2018 and 2019, with the central bank now expecting GDP growth to average 3.5 per cent in the next two years.

The RBA also revised its inflation target, stating that it expects inflation to “pick up” in the next few years to 2.25 per cent in 2019 and a “bit higher” in 2020.

The RBA also continues to expect the unemployment rate to fall further to 4.75 per cent in 2020.

However, head of Australian economics at ANZ Research David Plank was surprised by the RBA’s “upbeat” outlook.

Mr Plank observed that “as if to emphasise the positive outlook”, the RBA statement “didn’t spend a lot of time on the downside risks”, adding that the central bank’s assessment of the housing market was “largely unchanged”, with its outlook for the global economy “exactly the same as last month”.

“In our view, a statement this upbeat could be seen as a precursor to a rate hike in relatively short order, since the RBA is clearly expecting to make better than previously anticipated progress towards higher inflation and lower unemployment,” Mr Plank said.

“[The RBA] continues to assess this progress as ‘gradual’, however, which suggests it sees no great urgency in acting on its forecasts.”

Mr Plank added: “We also think that the central bank will want to see clear indications of stability in house prices before it thinks about raising interest rates.”

The economist also noted that strong wage growth figures in next week’s Q3 data would also be a “challenge to market expectations” regarding a cash rate hold into 2019.

Mr Plank also stated that ANZ Research’s forecasts are “somewhat less positive” on the growth and inflation outlook.

Mr Plank said: “This and the expectation that house prices won’t stabilise until around the middle of next year means we are sticking with our long-standing expectation that the RBA will tighten in August 2019 rather than bringing it forward to earlier in the year to reflect the [RBA’s] more upbeat outlook.”

Mr Plank concluded: “While we don’t think the statement can be read as anything but more hawkish, the market’s assessment of the language actually dipped somewhat in terms of hawkishness. Consistent with this market pricing for the cash rate and AUD was essentially unchanged on the day. All of which suggests the market doesn’t find the RBA’s outlook convincing.”

[Related: RBA reveals November cash rate]

‘Hawkish’ RBA outlook could signal early rate hike
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