Shadow RBA says hike mortgage interest rates!

From The Shadow:

With little significant economic data released during the past four weeks, the outlook for the Australian economy looks stable. Domestic CPI inflation remains at 1.9%, below the Reserve Bank of Australia’s official target band of 2-3%; while the unemployment fell to 5.4%. The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for. Instead, it attaches a 49% probability that holding interest rates steady at 1.5% is the appropriate setting, while the confidence in a required rate hike equals 51%.

The seasonally adjusted unemployment rate in Australia, according to the latest ABS figures, fell from 5.6% in April to 5.4$% in May. An additional net 12,000 job were created but more than 20,000 full-time jobs were lost. The labour force participation rate remained virtually unchanged at 65.5%. Nominal wages growth still stands at 2.1%. The next data point with will be eagerly anticipated to see whether recent calls by economists and policy makers, including the RBA, for higher wages have any effect.

The Aussie dollar, relative to the US dollar, has fallen significantly, now trading around 73 US¢. According to many market commentators further declines are likely. Yields on Australian 10-year government bonds have continued their gentle decline to 2.6%. The Australian stock market, on the other hand, joined the global rally; the S&P/ASX 200 stock index recently closed above 6,200.

On the global stage, economic data is mixed. The US recovery looks decent and even growth in the Euro area ticked up but the sabre rattling between Donald Trump and the US’s main trading partners does not bode well. The US administration’s recent increase in tariffs, to which China in particular has retaliated, are due to be succeeded by additional tariffs. A widening of the trade war will likely damage the Australian economy. Crude oil prices have settled well above US$70 and may to help to mildly fuel Australian inflation.

Consumer confidence, as measured by the Westpac Melbourne Institute Consumer Sentiment Index, remained largely unchanged. Business confidence, according to the NAB business confidence index, dropped noticeably by 5 points from 11 to 6 in May. The manufacturing PMI declines marginally whereas the services PMI rose from 55.2 to 59 in May. Capacity utilization slid from 82.45% to 82% in May. The Australian housing market continues to cool off, with construction, building permits, and new home sales all down.

The distribution of the Shadow Board’s policy preferences has again remained stable. The Shadow Board is 49% confident that keeping interest rates on hold is the appropriate policy, 2% lower than one month ago. It attaches zero probability that a rate cut is appropriate (unchanged) and a 51% probability (49% in June) that a rate rise, to 1.75% or higher, is appropriate.

The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% equals 22%, unchanged from the previous month. The estimated need for an interest rate decrease is 5%, while the probability attached to a required increase equals 73% (also unchanged). The numbers for the recommendations a year out have likewise barely changed. The Shadow Board members’ confidence that the cash rate should be held steady equals 15% (14% in June), while the confidence in a required cash rate decrease equals 5% (3% in June), and in a required cash rate increase 80% (82% in June).

Arrayed against it is the entire market economics community, at the AFR, though some still want hikes:

The median economist surveyed by The Australian Financial Review now sees interest rates on hold through to June 2019, compared to March’s survey, which indicated the Reserve Bank would hike twice by this time next year.

Those hikes have been pushed out to December 2019, which would take the cash rate to 2 per cent from 1.5 per cent in 18 months’ time.

…Economist Warren Hogan, who has worked in federal Treasury and was ANZ chief economist until 2016, urged the Reserve Bank to consider carving out policy space with a nod to the BIS’ determination late last month that central banks should capitalise on favourable conditions to “rebalance the policy mix” to avert walking into a debt trap, concluding: “building room is a priority”.

…”This means getting on with the task of monetary policy normalisation even if it comes at some cost in terms of growth and employment,” said Mr Hogan in The Australian Financial Review’s quarterly survey of economists.

Meh. What is the point of preparing for a shock by delivering one? Especially when the banks are about to deliver it anyway. Households will buckle.

Next cash rate move is down.