RBA still steadfast with rate-hike expectations

Lloyd Doyle
February 9, 2019

Economists and traders are forecasting that the next rate move is more likely to be a cut than a hike.

The need for the Reserve Bank to cut interest rates has increased in recent months, its governor Philip Lowe has confirmed.

"There is a common economic element to [these risks] and that is the extended period of little or no growth in real incomes for many people", Lowe said.

Not surprisingly, the Australian dollar was sent skidding 1.1 percent to a one-week trough of $0.7153.

Given the underwhelming performance of the housing market at the start of the year, he said RBA may be becoming less comfortable with the housing sector. "The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process", Lowe said.

The Pound New Zealand Dollar (GBP/NZD) exchange rate is soaring today, after a dovish outlook from the RBA prompted broad weakness in risk-sensitive currencies.

Sally Tindall, research director at RateCity.com.au, said banks have tightened the screws over the previous year to make sure people aren't in loans they can't afford to repay, but the clampdown has only made the banks hungrier for the right type of customers. It also added Chinese growth has continued to slow, which is a major risk for the Australian economy.

"This is increasing pressure on the RBA to lower rates, particularly when you weigh up all the negative factors which include the coming federal election, the response to the final report of the Hayne Royal Commission, the falling property market and external matters such as the US-China trade war and Brexit".

However unlike some, McCarthy is still expecting the rate to rise when the RBA do make their move.

The Dow Jones Industrial Average fell 5.66 points, or 0.02 percent, to 25,405.86, the S&P 500 lost 4.06 points, or 0.15 percent, to 2,733.64 and the Nasdaq Composite dropped 14.25 points, or 0.19 percent, to 7,387.83. If that pans out, the RBA expects wages growth and inflation to pick up gradually over 2020. So, the shift to neutral today shows they are not entirely confident of those forecasts. We maintain this view, but think the risks of a rate cut have grown considerably.

"The likelihood is that they will have to cut because house prices almost always draw the broader economy into weakness, and they're falling very fast in Sydney in Melbourne and are now falling in all major capitals".

"In the event of a sustained increase in the unemployment rate and a lack of further progress on towards the inflation objective, lower interest rates may be appropriate at some point and we have the flexibility to do this".

Other reports by Iphone Fresh

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