AUD View: FXWW

From the FXWW Chatroom – Against the backdrop of financial markets pricing-out ~30bp of end-CY18 rate hikes over recent months, we have pushed-out our forecast start to the RBA’s tightening cycle by 12 months to November 2019. Beyond that we expect the cash rate to rise +50bp per year. There are two key reasons for the change.
We have revised lower our near-term forecasts for inflation. In annual average terms, we expect headline inflation to rise by +2.0% in CY18 and +2.2% in CY19 (both ~-10bp lower than previously forecast). We expect underlying inflation[1] to rise by +2.0% in CY18 and +2.1% in CY19 (both ~-10bp lower than previously forecast) – within this, year-ended growth to 4Q2018 is ~25bp lower at +2.1%yoy.

We have updated our financial stability composite. Falling house prices and a rise in household incomes have contributed to a sharp fall in financial excesses, reducing pressure on policy makers to “lean against the wind” with higher interest rates.

We have pushed-back our forecast start to an RBA tightening cycle by 12 months to November 2019. We forecast the cash rate to rise by +50bp pa to 2.75% by end-2021 (previously: 3.5%).

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