Market predicts Two RBA Rate Hikes over the Next Year!

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Australian Economy

Amid the recent hustle bustle in stock market with many macro factors weighing over the stock indices, there seems to be a wave of discussion on RBA’s probable move of hiking interest rates over the next year. The recent RBA board meeting (in which RBA held rates steady at 1.5 per cent for a 13th straight month) touched upon the overall Australian economic view with a focus on labor market scenario, and this seems to have given rise to many versions with regards to the interest rate change predictions for the next year.

For instance, ANZ Bank has predicted that the Reserve Bank will raise official interest rates by 0.5 percentage points in 2018 as the Australian economy is gradually improving. They have pointed to a strong outlook for private business (non-mining) investment, underlying inflation reaching 2 percent, strong public spending and lower unemployment. David Plank, head of Australian economics at ANZ has said that they have revised the growth forecast and are much more optimistic about the economy. The first hike is expected for May 2018. Furthermore, Australia’s cash rate has been at a record low of 1.5 per cent since last August, but ANZ economists David Plank and Felicity Emmett said that the data suggests that “downside risks” to the economy have eased, removing the need for ultra-low rates. There is a mild tightening cycle for the such low rate, partly because of the global interest rates’ scenario and highly indebted Australian households. In addition, the economists believe that if the cash rate stayed at its current low, “real” or inflation-adjusted interest rates would be negative, which is not necessary in an improving economy.

In coherence with the economic state as pointed out by ANZ, RBA is becoming more optimistic on the overall outlook, but still has been reluctant to raise interest rates this time. Governor Philip Lowe has stated that the economy was growing as per the expectations and was likely to pick up; however, the stronger Australian dollar has weighed over this positive. Further, the continuing high household debt and low wages growth still remain to be the problems for the economy, with household borrowing outstripping the growth in hourly earnings. Moreover, compared to many other developed economies, the RBA has not been forced to bring the interest rates to zero or even in negative territory, as the Australian economy remained relatively well insulated after the global financial crisis.


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