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Citi’s recently released report Australia Economics & Multi-Asset View claimed that the nation’s economy now faces a “second rebalancing challenge” as the housing boom begins a “protracted unwinding”.
According to Citi, a reliance on housing has created macroeconomic risks, and economic growth may remain around trend rather than accelerating, both factors that will likely impact the RBA’s rate strategy.
Inflation is likely to remain subdued, Citi said in the report: “Indeed, underlying inflation may struggle to rise much above the bottom end of the RBA’s 2 to 3 per cent target.”
“This in turn means there is no real pressure to raise interest rates to defend the inflation target. [However], the RBA won’t want to encourage more household debt. We doubt the RBA would rush to judgement on whether early signs that house prices might be slowing is the start of a turn in the cycle.
“Although the softer April house price data could reflect the workings of APRA’s tightening of lending standards and increases in some lending rates, in one paper by RBA economists at a recent RBA conference, the view was that ‘there is currently mixed evidence of the effectiveness of macroprudential tools’.
“It’s worth noting that house prices in other hot global markets slowed temporarily in response to macroprudential measures only to rebound.”
Citi concluded that while rate cuts are possible, the economic outlook would need to deteriorate, which it doesn’t see as likely.
“A large enough shock to the economy, including a sustained and large correction in house prices could see the RBA cutting again. Indeed, it will be challenge to deflate the housing boom gradually without tipping the economy into a hard landing.
“On balance, we retain our view that the next move in rates is up.”
Meanwhile, other commentators have put forth predictions that the RBA is likely to remain on hold for the foreseeable future.
Earlier this month in a response to the latest finder.com.au RBA survey, ABC Bullion economist Jordan Eliseo said that the RBA remains “in no rush” to cut interest rates, despite the fact that most economic data has been soft and inflation remains well-controlled.
“Financial stability concerns are still a factor, though we remain of the view that there is more downside to come for rates in the next 12 months,” he concluded.
Similarly, AMP Capital chief economist Shane Oliver said that low underlying inflation and wages growth prevent a hike, and Stephen Koukoulas of Market Economics insisted that the RBA continues to misread inflation, unemployment, wages and growth. “It should cut but it won’t,” he said.
[Related: RBA makes cash rate call]