The Reserve Bank of Australia opted to keep interest rates on hold at 1.5% at its second last meeting of the year yesterday and there won’t be a change until well into 2020, even though the central bank lifted its growth forecasts for the economy noticeably.
The RBA lifted its growth expectations to 3.5% for this year and next from the previous estimate of “a little over 3%”.
“The Australian economy is performing well,” RBA Governor Philip Lowe said. “The forecasts for economic growth in 2018 and 2019 have been revised up a little.
“The central scenario is for GDP growth to average around 3.5% over these two years, before slowing in 2020 due to slower growth in exports of resources.”
Previously, the RBA saw GDP growth averaging 3.25% both this year and next.
The bank also said it now sees unemployment falling to around 4.75% in 2020 (down from 5.25%) and inflation moving above its previous forecast of 2.25% in 2020. The bank said it expected inflation to be 2.25% in 2019 as forecast and “a bit higher the following year”.
And yet against that background, the talk from the market would be ‘rate rise looms’ and the statement from Governor Phil Lowe would be combed time and time again to try and discern anything that indicated a change of timing on rates changes (a rise).
But there was nothing in Mr. Lowe’s post-meeting statement, so this Friday’s 4th Statement on Monetary Policy for the year will be given the same treatment because they will contain the new forecasts and the bank’s explanations for the revisions.
“While there were no surprises on rates, the RBA’s growth expectations have surprisingly moved higher seeing GDP growth of 3.5 percent this year and next,” AMP Capital chief economist Shane Oliver wrote yesterday afternoon. That forecast is around 0.25 percent higher than its previous forecast, Dr. Oliver noted.
“While some upwards revisions to growth forecasts and downwards revisions to unemployment forecasts were justified by recently released data our assessment is that the RBA is underestimating the threat posed by slowing growth in China, tightening credit conditions and a negative wealth effect as house prices continue to fall, particularly in Sydney and Melbourne where we anticipate a top to bottom fall of 20 percent stretching out to 2020,” Dr. Oliver wrote.
“Right now the RBA likely feels comfortable in its assessment that while there is no case to change monetary policy at present that the next move on interest rates is more likely to be up than down.
“This also remains our base case, although we don’t see a rate hike until late 2020 at the earliest. However, with the risks to growth around tighter credit, falling house prices, the associated drag on consumer spending and the risks around China our assessment is there is a rising risk that the next move on rates will be a cut.
“But that’s a second half 2019 story at the earliest because the RBA will need to see broader signs of softness to consider cutting interest rates and that will take time. So, there is no prospect of imminent RBA rate cuts “rescuing” the housing market,” Dr. Oliver wrote.
