Market Update, News, Exchange Rates, AUD, Australia

The first in a string of RBA rate hikes is coming sooner than you thought

Goldman Sachs thinks it will be months — not years — until the RBA hikes rates. Andrew Boak and Bill Zhu from the Goldman Sachs Australian economics team think the RBA will lift the cash rate for the first time since 2011 by Melbourne Cup day this year.

Financial imbalances are building and RBA governor Philip Lowe places a great deal more weight on financial stability risks fearing macroprudential policies to cool rampant investor activity in Australia’s housing market may not work.

Read the full article at Business Insider Australia.

Boak and Zhu’s view: We have pulled-forward our forecast start of the RBA’s tightening cycle to November 2017 and now expect two rate hikes in 2018, and three subsequent increases in 2019 to take the cash rate to 3.0% by 2020.

The Australian Financial Review notes: In his post-meeting statement, Dr Lowe noted that US interest rates were "expected to increase further" and that other major central banks were no longer delivering extra monetary policy easing.

Policymakers are paying particularly close attention to developments in the US, where the Federal Reserve is widely forecast to increase the target rate this month for only the third time since late 2015.

The main question marks hanging over the outlook remain the labour market and bubbling house price growth in Sydney and Melbourne, which the Reserve Bank unquestionably described as "strong".

The dollar spiked briefly to as much as US76.26¢ after the announcement before returning to its pre-meeting level of about US76¢.

Any uncertainty is likely to lead to instability in the exchange rate, making it particularly difficult to anticapte future trends.

With the fed anticipated to move first on further raising the US interest rates, and strong economic numbers expected, plus the admittedly somewhat uncertain and so far unfunded promises on infrastructure spending and tax cuts by President Trump, the US Dollar should improve in strength.

Likewise, an improved economic outlook in Australia coupled with firming resource pricing are the underpinnings of a strong Australian Dollar. Yet Chinese growth is retreating and steel manufacturing capacity is to be curtailed.

Exactly how that plays out will be hard to forecast with certainty.

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About Tim Strube