RBA would need to hike eight times to get back to “neutral” - Rabobank

Michael Every, Senior Asia-Pacific Strategist at Rabobank, points out that the RBA would need to hike eight times from here to get back to “neutral”, underlining how accommodative things still are – and how optimistic they are to think they can ever get back there again.

Key Quotes

“We got the RBA’s July minutes, which included the following important discussion: “Members discussed the neutral real interest rate and its decline over the preceding decade. The neutral real interest rate is the interest rate at which output growth is at potential and inflation is stable…The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1%. This equated to a neutral nominal cash rate of around 3.5% per cent, given that medium-term inflation expectations were well anchored around 2.5%, although there is significant uncertainty around this estimate.”

“Members regarded the improvement in the world economy over the preceding months as a welcome development. Nevertheless, they assessed that current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labour and housing markets continued to warrant careful monitoring.” In other words, we know where we ought to be – but can we ever get there? With AUD up to 0.7825 on talk of 3.50% rates, even in the RBA’s dreams, I’d wager we are even further away from ever getting there.”