There’s been a big switch in interest rate forecast from AMP Chief Economist, Dr Shane Oliver who now believes it will be two years at least before we see a rate rise from the Reserve Bank.
The central bank’s board meets later today and will sit on its hands for a record 20th month in a row, with the post-meeting statement underlining that caution.
There are still local economists who believe there will be a rate rise later this year from the RBA because of the pressure from the US Federal Reserve’s current campaign of rate increases and rising pressures in Australia from an economy that is doing well, even if it is ambling along in second year.
For example, the National Australia Bank’s economics team wrote last week “that the RBA will want clear evidence that wages growth and inflation are moving higher before removing some policy accommodation, and we don’t expect sufficient evidence of this until late 2018 (with the first hike expected in November), with the risk that it occurs later. “
But in his weekly note at the weekend, Dr Oliver revealed his change of mind, writing. “We now don’t see the RBA commencing a tightening cycle until sometime in 2020 and another rate cut cannot be ruled out.”
“We had been expecting the RBA to start raising rates in early 2019 but with the further tightening in bank lending standards effectively doing the RBA’s work for it and growth likely to remain below 3% and inflation around 2% for longer we now don’t see an RBA tightening until sometime in 2020.”
"With the Fed likely to continue hiking this only adds to confidence in our view that the $A will fall towards $US0.70. And on this front its noteworthy that it appears to be breaking below the rising trend line that’s been in place since 2015.”
That’s a big change in emphasis from his comment after last Tuesday’s Consumer Price Index report from the Australian Bureau of Statistics (which showed the CPI rose 0.4% from the final quarter of 2017 for an annual rate of 1.9%, which was a bit weaker than normal).
“Our base case is for a rate hike in the first quarter of next year but ongoing soft growth, low inflation, low wages growth and the tightening in bank lending standards now underway around borrowers’ income and expense levels indicates that the risk is that the RBA will remain on hold for much longer and that another rate cut cannot be ruled out,“ Dr Oliver wrote. Now that rise could be two years away in his opinion.
Tomorrow’s board RBA meeting will give some support to Dr Oliver’s forecast by finalising the second Statement of Monetary Policy for the year (which will be released on Friday morning).
Economists widely believe the RBA will trim its growth estimate from 3.25% to 3%.
Dr Oliver says “The RBA is expected to make only minor changes to its 2018 forecasts in its Statement of Monetary Policy with a slight rise in its underlying inflation forecast to 2% and a downgrade in its growth forecast to 3%, but these are unlikely to affect the outlook for interest rates.”
That will be a sign that the underlying economy might be a bit less certain than previously thought.
