Economy

Bill Evans: RBA just capitulated on growth

Bill Evans: RBA just capitulated on growth

If the RBA does dial up the worries about currency strength, next week could well see AUD/USD headed lower still.

Current pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates while also providing insight into investor expectations for monetary policy, suggest the RBA will not raise the Australian cash rate until well into 2019.

In all recent statements, the Governor has noted "the Bank's central forecast for the Australian economy is for GDP growth to pick up to average a bit over 3% over the next couple of years".

There is a 40% implied probability of a rate hike in November 2018 and an 80% implied probability of a rate hike in February 2019 but not at any point is a rate hike fully price.

GMHBA recorded the lowest at 63 per cent.

Much will of course depend on what goes on in the broader foreign exchange market this week, especially in the United States where President Donald Trump last week announced higher tariffs on imported industrial metals.

Increased public infrastructure investment also supporting the economy.

The Reserve Bank of Australia (RBA) expects the country's gross domestic product to "grow faster in 2018 than it did in 2017". The RBA continues to highlight the outlook for household consumption as a "continuing source of uncertainty".

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Employment grew strongly in 2017, with forward indicators pointing to continued improvement, while wage growth remains low, which is expected to continue for a while yet, though appears to have bottomed out. It added that "the rate of wage growth appears to have troughed and there are reports that some employers are finding it more hard to hire workers with the necessary skills".

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing.

This will be a major week for the Australian dollar.

"The controlled slowdown in housing markets, driven by subtle falls across Sydney and Melbourne, has eased pressure on the RBA to lift rates in order to quell housing market exuberance", said Mr Lawless.

"We no longer expect a rate hike in 2018, following the greater than expected emphasis on the mid-point of the inflation target band and increased comfort on financial stability risks in the RBA Governor's speech on Thursday evening", said ANZ's head of Australian Economics, David Plank.

The change in rhetoric comes as analysts downgrade forecasts for fourth-quarter GDP, due tomorrow.

This strength did not last long, however, with the GBP/AUD exchange rate swiftly returning to volatile form as the Australian Dollar was weakened by announcements from the White House that the U.S. would levy tariffs on steel and aluminium imports.


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