Goldman Sachs bottom line on the RBA: Rates likely to move higher over coming months

Author: Eamonn Sheridan | Category: Central Banks

Goldman Sachs has sent out a commentary on the speech from Reserve Bank of Australia Assistant Governor Luci Ellis

Headlines from the speech are here and more here. For me Ellis leant more hawkish than the Bank has been recently.

From GS, bolding mine:

Bottom line: In a speech today, RBA Assistant Governor (Economic) Luci Ellis expressed the view that the global economy has turned and suggested there was a risk in falling "behind the curve in catching a change in economic momentum".
  • Dr. Ellis noted the current expansion was not "a flash in the pan", citing a suite of indicators on surveyed sentiment, global trade and business investment.
  • While acknowledging that "nothing is ever clear-cut", Dr. Ellis emphasized the importance for policymakers to stay ahead of the curve, "because waiting until you are 100 per cent sure things have changed means waiting too long".
We share this view and believe the RBA is increasingly confident about the outlook for the global and Australian economy. In turn, we believe the RBA will not need to wait for inflation and wage growth to return to levels seen in prior cycles before tightening monetary policy, particularly given the level of accommodation currently in place. This is consistent with our view that rates are likely to move higher over the coming months, as the macro backdrop improves further and tentative signs of higher inflation and wages emerge (GS: +25bp February 2018; 60% probability).

More detail from GS:

1. Hard data follows soft data: Dr. Ellis pointed out that the first signs of a positive inflection point in the global economy came through an improvement in sentiment surveys (as well as financial market pricing) towards late 2016, followed by a pick up in timely hard data such as trade and industrial production. Investment lagged somewhat, as firms waited to see a pick up in demand, but has now improved as well. This all bodes well for Australia, where business surveys remains elevated and non-mining business investment is starting to turn around.

2. The outlook for inflation and wage growth: While acknowledging that price pressures have been subdued to date, Dr. Ellis asserted that the RBA believes the forces of supply and demand "do assert themselves" and that price and wage growth will pick up in the next phase of the cycle. Combined with the statement that there is a risk in "waiting too long", the implication here is that the RBA will not necessary wait until inflation and wages return to their long-run 'steady state' growth rates before tightening policy. Our recent note on the persistence of wage growth in Australia explores this point in more detail and comes to a similar conclusion.

3. Balancing act with uncertainty in productivity growth: Dr. Ellis also made the point that inflation pressures will depend on how the supply side of the economy evolves as the economic cycle improves. If productivity improves alongside the pick up in demand, then inflation and wages may remained lower for longer. However, if productivity remains stable then inflation and wages will pick up more rapidly, and financial imbalances will worsen.