RBA on hold; macro prudential policies have worked for the RBA; risk of more on the way


The Reserve Bank Board meets next week on March 7.

We can be certain that the decision from the Board will be to hold rates steady.

Recall the comments from the Governor in his answer to a question during his appearance before the House of Representatives Standing Committee on Economics, “At the moment the market pricing is for interest rates to be constant right through this year. That seems a reasonable proposition to me…. The central scenario of a period of stability of interest rates is quite reasonable to me.”

Now we have never framed our medium term forecasts around the views of the Reserve Bank – after all they are only “mortal” forecasters like the rest of us. Their forecasts can go awry and policy can change accordingly. But for the immediate future (like next week) we can take the Governor’s views as definitive.

Our view since the rate cut in May 2016 has always been for a follow up move in August and then steady rates throughout the remainder of 2016, 2017 and 2018.

We assess that the Governor currently has that view for 2017 but has not commented on the market implied two rate hikes in 2018.

His growth forecast in 2018 of 2.75%-3.75% (down from 3-4%) is well above our forecast of around 2.5% (with downside risks). Achieving the RBA’s growth forecast in 2018 might be consistent with market pricing but our forecast for a slowdown in 2018 is certainly not consistent with rate hikes – below trend growth signals steady rates at best.

In his comments to the House, the Governor considers the case for rate cuts in 2017. He points out that inflation is below the target range (“a bit low”) and that the unemployment rate is “a bit high”. We would assess full employment at around 5% so, at 5.8%, there is clear excess capacity in the labour market. Of course, that spare capacity is further emphasised in the latest wages report which showed private wages growth at a record low of 1.8%.

However, his clear problem with leaning further on interest rates is “The main effect (of a rate cut) would be more borrowing for housing, pushing up house prices…”.

Reference: WestPac Banking Corporation
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