Interest Rate Update
Rates on hold: Why no one agrees on what comes next for interest rates
Consensus followed by a quarrel: Economists’ RBA outlook all over the shop
Not-so-new Reserve Bank chief Philip Lowe has already carved a place in history as the only governor not to move rates in his first year, and while practically no one expected any immediate move from the central bank, forecasts from major economists quickly diverge when looking down the line.
The official RBA cash rate is widely expected to remain at a record-low 1.5 per cent at February’s meeting, which would mark the 18th consecutive on hold.
Speak to almost any economist and they’ll treat this month’s result as a foregone conclusion, but much disagreement erupts when you ask what’ll happen later this year as a mix of major economic voices call for further patience, hikes and even cuts. The same data appears to point several different ways depending on who you ask.
House price gains have begun unwinding amid moves from the Australian Regulation and Prudential Authority to clamp down on investor and interest-only lending, and with household debt reaching eye-watering heights above 200 per cent of income, the nation’s mortgage-holders are closely watching interest rates extremely closely.
But they can probably relax for at least a while.
“This track record should remain intact after the first board meeting for 2018,” Commonwealth Bank chief economist Michael Blythe said on Monday. “The cash rate should remain firmly fixed at the record low of 1½ per cent.”
“Any board member running their eye down this checklist would probably agree that the next move in interest rates is up … But they would also agree that there is no urgency to act.”
Focus remains on stubbornly weak inflation data, with last week seeing yet another sub-par read of 0.6 per cent for the quarter and 1.9 per cent through the year – below the Reserve Bank’s target and a central cause behind to its hesitation in hiking rates.
The key question of when inflation will provide some wiggle room in the RBA board room is where economist tend to disagree, using other factors like the state of the global economy, local employment, Australia’s currency, wages, consumer spending, business confidence, and debt levels to support their various arguments.
Here’s a particularly interesting one. “Unlike the RBA, we do not see core inflation returning back to target anytime soon,” Credit Suisse analysts wrote on Thursday.
“This takes away from the case for near-term rate hikes. The bigger question, in our view, is whether a meaningful inflation undershoot will prompt the RBA to cut rates.”
That’s right – Credit Suisse wonders if another cut is in the pipeline. ANZ, meanwhile, predicts an RBA rate hike will happen in May and again later in the year, while looking at the same data sets. Plenty of disagreement exists.
A unique and compelling case is made by almost all big-name economists – Westpac sees rates as staying on hold all through 2018 and 2019, AMP’s Shane Oliver reckons a hike could happen later this year, UBS economists are eyeing a hike in 2019, and Morgan Stanley simply says it sees no hike happening this year.
So, with all that in mind, what about the punters? How are the nation’s gamblers positioned?
Predictably, betting on the February decision won’t get you far, with the odds offered on a ‘no change’ result at tomorrow’s meeting through SportsBet is an un-backable $1.01, while a single hike shows $8 odds and a cut offers $26.
Looking further down the track, Sportsbet’s ‘direction of the next rate movement’ wager is currently offering $1.20 on a bet that the RBA will raise rates as its next move and $4 on a bet it will cut.
What’s clear is that both economists and punters will be eager to see when Philip Lowe makes his first major move as governor – they’ve got almost as much riding on it as the average homeowner.
(Source : Domain Announcements Chris Kohler Feb 5, 2018 )