FED and RBA reassess growth prospects in opposite directions – Westpac

According to Bill Evans, Research Analyst at Westpac, notes that the widely expected decision by the US Federal Reserve to raise the federal funds rate from 1.375% to 1.625% marks the first time since January 2001 that the RBA cash rate has been below the federal funds rate.

Key Quotes

“We saw a marked firming in the estimates of rates amongst FOMC members for both the near term and 2019 and 2020.”

“If we exclude extreme views we can argue that six out of the twelve members raised their FED Funds forecast for 2018 by one full hike.”

“Australia and the US are operating at different stages of the economic cycle. This will be exacerbated by differing approaches to fiscal policy.”

“While the Australian Government has announced a plan for tax cuts they are structured to phase in over a much longer period than the Trump initiatives.”

“Trump’s policies engineered an immediate corporate tax cut from around 35% to 21% for all companies. This policy, along with the $300 billion in spending increases over the next 18 months, will boost the budget deficit from 2.8% of GDP to 4.1% in 2018. By 2020/21 this deficit will have increased to 5% of GDP.”

“On the other hand, Australia is currently estimated by the government to be running a budget deficit of 1.3% of GDP. A surplus of 0.5% of GDP is forecast by 2020/21 a period of fiscal consolidation.”

“We expect that tightening financial conditions; modest inflation and a slowdown in 2019 H2 will all constrain the FED’s policy relative to its current expectations – near to three more hikes in 2018 and three hikes in 2019.”

“With our unchanged RBA view and that revised FOMC profile we would expect to  see the cash rate differential reach around 160 basis points  by mid next year– a truly jaw dropping  prospect!”