Truth dawns on Shane Oliver:
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.
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.
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.
Next move is down.
