The Reserve Bank of Australia (RBA) is expected to adopt a tightening monetary policy in 2018 is boosted by the hawkish shift in the RBA’s language. This would reverse the rate cuts of 2016 and take the real cash back to zero.
The change to in view on the RBA reflects an outlook for growth that is a touch more positive than previously and an easing to the downside risks to both growth and inflation. Growth is seen at 2.9 percent in 2018 and 3 percent in 2019, with the unemployment rate declining to 5.3 percent by the end of next year.
A strong rally in the AUD toward 90 cents, for instance, could be enough to defer a rate hike in 2018. Likewise, evidence that core inflation or wages are slowing again would rule out a rate hike in 2018. There seems to be much risk of more than 50 basis points of hikes in 2018 given indebted households, though a sharply weaker AUD that was due to portfolio shifts rather than weaker global growth is one possible (if unlikely) trigger.
"After these hikes we see the Bank sitting pat in 2019 as highly indebted households digest the impact of higher rates," ANZ Research reported.
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