RBA to start hiking in H2 2018 - NAB

The RBA left the cash rate on hold in December, affirming that current settings remain appropriate and the latest Statement on Monetary Policy revealed a central bank that is more positive, with the outlook for non-mining investment further improving and the labour market strong, according to analysts at NAB.

Key Quotes

RBA remains concerned about risks to household consumption against a backdrop of weak income growth and high debt levels.”

“The RBA welcomes the stronger trends in investment from non-mining and government sources, as well as positive looking forward-indicators. Improved outcomes for employment and capital spending are driving a more confident growth outlook, although spare labour market capacity will need to shrink further for wages growth to lift. Encouragingly, firms are reporting greater difficulty sourcing suitable labour, which is normally a pre-cursor to reduced spare capacity and strengthening wages. The RBA appears to be watching this measure from our NAB Quarterly Business Survey closely, as well as reports from its liaison program.”

“The RBA will be reluctant to raise rates until there are reliable signs that wages growth and inflation are moving in the right direction, especially as the cooling housing market has simultaneously lessened the urgency for RBA rate hikes. However, we expect that stronger labour market conditions will see wage growth lift over time. Additionally, the RBA’s concerns around household balance sheets are unlikely to dissipate, especially as levels of household debt continue to rise faster than incomes. On balance, for now, we retain our view that the RBA will begin gradually lifting interest rates in H2 2018 as the unemployment rate falls further.”

“Rates differentials, softer commodities and reduced risk sentiment could all weaken the AUD, which we now see headed into a lower 0.70-0.75 range. The RBA has consistently warned that an appreciating exchange rate would result in a slower pick-up in economic activity and inflation, thus making it ideal for AUD/USD to be below 0.75 and above 0.70. Additionally, RBA Governor Lowe has expressed that rising US interest rates are likely to be associated with some further weakening of the currency. At this stage, we have revised our point forecasts to 0.72 (from 0.73) by mid-2018 and 0.73 for end-2018.”