2017 on hold, but pencil in RBA rate hikes for 2018: HSBC's Paul Bloxham

GUEST OBSERVER

The RBA kept its cash rate steady at 1.50 percent, as widely expected.

The post- meeting statement also very clearly retained the RBA’s neutral policy stance. At this stage, the RBA clearly has close to no appetite to consider that it should cut rates further.

This is despite the RBA’s own expectation that tomorrow’s Q3 GDP print will be weak, with the statement noting ‘some slowing in the year-ended growth rate is likely, before it picks up again’ (Bloomberg shows the current market consensus is for a -0.1 percent q-o-q fall in Q3 GDP). Of course, in many ways, the Q3 numbers will be old news, given that they largely pre-date the sharp jump in export prices and the election of Donald Trump.

The RBA noted, in particular, that higher commodity prices are boosting national income. We expect the RBA to keep its cash rate on hold through 2017.

Facts

The RBA kept its cash rate steady today at 1.50 percent, as expected by all 27 economists in the Bloomberg survey. Just prior to the decision the market was pricing no chance of a cut.

Implications

Today’s RBA announcement delivered few surprises. The central bank kept its cash rate on hold at 1.50 percent, as expected, and the post-meeting statement maintained the RBA's neutral policy stance, again, as expected. The post-meeting statement repeated that leaving rates on hold would be ‘consistent with sustainable growth in the economy and achieving the inflation target over time’.

The market focus now shifts to the Q3 GDP print for Australia.

A weak q-o-q print is forecast (Bloomberg’s latest survey has a consensus of -0.1 percent q-o- q and 2.2 percent y-o-y), reflecting a weak run of partial indicators on the expenditure side of the accounts in recent days. The RBA only stated that ‘the annual rate of growth is likely to slow’, suggesting that they may still be expecting a positive q-o-q print. More importantly, they stated that they expect it to pick-up again soon.

In many ways the Q3 GDP print is likely to be old news. Firstly, most of the partial indicators, including business surveys and retail sales suggest growth will bounce back in Q4. Secondly, the bulk of the ramp up in hard commodity prices is set to flow through in Q4, further boosting income growth in the quarter. Thirdly, the election of Donald Trump, rally in bond markets, ramp up in expectations of Fed hikes and strengthening in the USD (and conversely weaker AUD) have all arrived more recently.

As a result of these more recent developments and the RBA’s continued neutral policy stance in today’s statement, the current market pricing suggests only a 20 percent chance of a 25bp cut by mid-2017 before a 20% chance of hike by end-2017. We expect the RBA to keep its cash rate on hold through 2017 and have hikes pencilled in for 2018. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.