No rate change in 2018 and 2019: Westpac's Bill Evans

EXPERT OBSERVATION

The Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.

We have been interested to follow the various descriptions of the Bank’s growth forecasts over the last few months.

These have ranged from “a bit above 3%”; “central forecast remains for faster growth in 2018”; “growth above trend”; and today, “Growth to pick-up to average a bit above 3% in 2018 and 2019”.

In our preview of the SoMP, we speculated that the forecast would be modestly shaved to 3% in 2018 and 3 ¼% in 2019.

That would still be consistent with an average slightly above 3% and seems more likely than the 3 ¼%, 3 ¼% which was in the February SoMP. 

In its MYEFO in December the government forecast growth of 3% in 2018/19 and 2019/20 compared to 3.25% for the RBA. In 2018/19 and 2019/20 .

The Bank may choose to “go half way” given it is unlikely the government will change its forecasts in the Budget on May 8.

The other interesting forecast in the May SoMP will be underlying inflation in 2018. In February, the forecast was 1.75%, below the 2-3% target band and following 1.6% in 2016 and 1.8% in 2017 – hardly a vote of confidence in the 2-3% target band.

Commentary in this statement is the same as we have consistently seen with the recent inflation report being described as “in line with the Bank’s expectation”.

That would tend to suggest that it will remain cautious around the inflation outlook and forecast 1.75% for 2018.

Given that the trimmed mean printed 0.5% for the March quarter, the implication is that the Bank does not expect any marked lift in the quarterly pace through 2018.

In the minutes to the April meeting, the Board noted that it was more likely that the next move in rates will be up rather than down.

That sentiment was not in the Governor’s statement in April and did not figure in this statement. In fact, the final paragraph in the May statement is exactly the same as the final paragraph in the April statement.

Commentary in previous statements around the labour market has been unreservedly upbeat. It was therefore interesting to note that the Governor recognised that employment “growth has slowed over recent months”.

Nevertheless, the Governor remains confident that solid employment growth will lead to a gradual reduction in the unemployment rate.

In April, the Governor referred to tightening financial conditions due to the rise in short-term USD interest rates and this observation has been repeated today.

Sentiment around household consumption “source of uncertainty”; housing markets “have slowed”; and the AUD (TWI) “remains within the range it has been in over the past two years”; is consistent with recent statements.

Assessments of the global environment are largely unchanged despite the increase in long-term US bond yields of around 25bps.

Conclusion

We will receive a much more detailed update on the Bank’s views in the Statement on Monetary Policy on Friday. Since the last Statement, housing markets have slowed further; financial conditions have tightened; employment growth has slowed; and equity markets have become more volatile.

All of these factors point to the Bank having even more scope to remain patient with respect to policy.

As we have consistently argued since mid- 2017, Westpac continues to expect that the cash rate will remain on hold in 2018 and 2019.

BILL EVANS is chief economist of Westpac.