“We see the RBA tightening by 50 [basis points] in 2018. This would reverse the rate cuts of 2016 and take the real cash rate back to zero,” ANZ said.
“At this point, we think policy would be ‘appropriately expansionary.’”
The major bank noted that this is a turn of phrase the RBA’s Luci Ellis introduced in her speech last Wednesday (20 September).
“She was arguing that if ‘inflation remains low despite reasonable growth’, then ‘policy still needs to remain appropriately expansionary while avoiding further build-up of leverage and financial risk’,” ANZ said.
“In our view, a negative real cash rate will not meet this test in 2018. It would run the risk of encouraging a continued build-up in household leverage at a time when we think growth will be around 3 per cent with core inflation approaching 2 per cent. This is a set of economic outcomes that we don’t think requires maintaining a negative real cash rate.”
ANZ said that it sees high household leverage as a reason to modestly tighten rather than to leave the cash rate where it is.
However, it added that the leverage in household balance sheets will be a constraint on how aggressive the RBA is.
“The RBA governor made this clear this week when he said that ‘higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to.’”
[Related: Debt control: Too little, too late?]