From Westpac Chief Economist Bill Evans today on the Reserve Bank of Australia.
This is from his commentary on the leading index indicator. But of wider applicability.
Markets have quickly moved to price in rate hikes in Australia in 2018 partly in response to the Reserve Bank's July Board minutes which set out the Bank's revised estimate of 'neutral'.
- Since the GFC it has become clear that the new neutral rate will be lower than in previous years due to lower inflation; and lower trend growth particularly reflecting lower productivity growth and high risk aversion associated with excessive household debt.
- It is helpful that the Bank has finally put on record its assessment that 'neutral' has fallen from 5% to 3.5% (1% real and in line with thinking at the US Federal Reserve).
All central banks need to be assessing that target but this does not mean that a Bank is necessarily ready to begin tightening.
- The timing of that decision will come down to the state of the economy.
Westpac expects that growth in 2018 will be a below trend 2.5% with limited prospects of that improving much in 2019.
- Furthermore that growth rate is unlikely to be associated with much improvement in the labour market with considerable spare capacity likely to remain for some time.
The Reserve Bank has forecast 3.25% growth in 2018 and 2019 (year to June). With that profile they may be 'expecting' to begin the tightening process
- but with inflation below the bottom of the target range;
- the housing market cooling under the weight of regulators' macro prudential policies;
- and benign wages growth they have ample time to assess the reliability of that view.
- We expect that as the Bank is forced to revise down its growth and inflation forecasts through the remainder of this year and 2018 the need to raise rates will dissipate.
(reformatting and bolding mine)
