Are you prepared for an interest rate rise next year?
The ANZ Bank believes the RBA will raise interest rates by 0.5% in 2018.
If this occurs it would reverse the rate cuts of 2016 and take the "real" cash rate back to zero.
After these hikes, the ANZ sees the the RBA sitting pat in 2019 as highly indebted households digest the impact of higher rates.
This view is based on the view that the RBA believes the outlook for economic growth is a touch more positive than previously (Figure 1), along with an easing to the downside risks to both growth and inflation.
The ANZ sees economic growth of 2.9% in 2018 and 3% in 2019, with the unemployment rate declining to 5.3% by the end of next year.
The improving growth outlook and the lessening of the downside risks are against the backdrop of a stimulatory cash rate setting.
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The real cash rate is negative and is likely to remain so if the RBA cash rate stays at 1.5% (Figure 2).
Such a policy stance looks increasingly unnecessary, even if the rally in the AUD over the past 12 months or so has acted as at least a partial offset.”
What is the harm of continuing with a negative real cash rate if there is no evidence of a marked pick-up ininflation?
Several problems spring to mind.
First, w a negative real cash rate will encourage a continued build-up in household debt.
ANZ doesn’t think macroprudential policy will be able to counter the impact of continued low rates.
Indeed, one of the reasons ANZ have revised up growth for 2018 is that we think the housing market (both construction activity and prices) is proving more resilient than we expected.
Second, ANZ think there is a case for building up capacity for future easing (when it is possible to do so).