Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist, published on 28 June 2018.
In this week’s Oliver’s Insights, Shane Oliver gives us his insights on the debate around the RBA and Australia’s official cash rate.
The key points are as follows:
- The RBA should avoid calls to raise interest rates prematurely just to prepare households for higher global rates. Such a move would be like shooting yourself in the foot in order to practice going to the hospital.
- Nor should the RBA mess with the inflation target that has served Australia well.
- We don’t see it doing either and continue to see interest rates on hold out to 2020 at least and can’t rule out the next move in rates being a cut.
- This will mean term deposit rates will stay low, search for yield activity will still help yield sensitive unlisted investments (albeit it’s warning) and an on-hold RBA with a tightening Fed is likely to mean ongoing downward pressure on the Australian dollar.
It’s nearly two years since the Reserve Bank of Australia last changed interest rates – when it cut rates to a record low of 1.5% in August 2016. That’s a record period of inaction – or boredom for those who like to see action on rates whether it’s up or down. Of course, there are lots of views out that the RBA should be doing this or that – often held and expressed extremely – and so it’s natural that such views occasionally get an airing. This is particularly so when the RBA itself is not doing anything on the rate front.
And so it’s been this week with a former RBA Board member arguing that the RBA should raise rates by 0.25% to prepare households for higher global interest rates and that the RBA should consider ditching its inflation target in favour of targeting nominal growth.
Our view – rates on hold at least out to 2020
Our view for some time is that the RBA won’t raise interest rates until 2020 at the earliest. In terms of growth, a brightening outlook for mining investment, strengthening non-mining investment, booming infrastructure spending and strong growth in export volumes are all positive but are likely to be offset by topping dwelling investment and constrained consumer spending. As a result, growth is likely to average around 2.5-3% which is below RBA expectations for growth to move up to 3.25%. This, in turn, means that spare capacity in the economy will remain high – notably unemployment and underemployment at 13.9% – which will keep wages growth low and inflation down. On top of this house prices likely have more downside in Sydney and Melbourne over the next two years, banks are tightening lending standards which are resulting in a defacto monetary tightening and the risks of a US-driven trade war are posing downside risks to the global growth outlook. As such we remain of the view that a rate hike is unlikely before 2020 at the earliest and can’t rule out the next move being a cut.