From the FXWW Chatroom: We see the RBA tightening by 50bp in 2018. This would reverse the rate cuts of 2016 and take the real cash back to zero. After these hikes we see the Bank sitting pat in 2019 as highly indebted households digest the impact of higher rates.
The change to our view on the RBA reflects an outlook for growth that is a touch more positive than previously and an easing to the downside risks to both growth and inflation. We see growth of 2.9% in 2018 and 3% in 2019, with the unemployment rate declining to 5.3% by the end of next year.
Our confidence in looking for rate hikes in 2018 is boosted by the hawkish shift in the RBA’s language, as indicated by our RBA Bias Index.
We think the risks are weighted toward less rather than more. A strong rally in the AUD toward 90 cents, for instance, could be enough to defer a rate hike in 2018. Likewise, evidence that core inflation or wages are slowing again would rule out a rate hike in 2018. We struggle to see much risk of more than 50bp of hikes in 2018 given indebted households, though a sharply weaker AUD that was due to portfolio shifts rather than weaker global growth is one possible (if unlikely) trigger.
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