Need for rate hike is “increasing”

by Rebecca Pike04 Dec 2018

The final cash rate of 2018 will be decided today at a meeting of the Reserve Bank of Australia (RBA).

The rate has remained at 1.5% since August 2016 and experts are not expecting it to change today.

The shadow board of the RBA at Australia National University has said there is no need for a change this month, but the need for a rate hike in the next six months “is increasing”.

That comes despite many experts suggesting a rate move may not happen until 2020.

The shadow board said there were “some encouraging signs” for Australia’s economic outlook, with unemployment remaining low and wage growth slowly improving.

However, Dr Timo Henckel, chair of the shadow board, said wage growth will need to be sustained in the future to ease household budget constraints.

Discussing today’s rate decision, Henckel said, “The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for.

“It attaches an unchanged 53% probability that holding interest rates steady at 1.5% is the appropriate setting, while the confidence in a required rate hike equals 47%."

Looking further ahead, the estimated probability the cash rate should remain at 1.5% in six months is 26%, down slightly from November.

The estimated need for a rate decrease is unchanged at 6%, while the probability attached to a required rate hike has increased from 64% to 68%.

AMP’s Shane Oliver said the RBA remains “between a rock and a hard place”.

He added, “Strong infrastructure spending, improving non-mining investment, a lessening drag from falling mining investment and a fall in unemployment to 5% are all good news.

“But against this the housing cycle has turned down, this will act as a drag on housing construction and consumer spending via a negative wealth effect, wages growth remains weak, inflation is below target and share market volatility is highlighting risks to the global outlook. So yet again the RBA will remain on hold.”

Canstar’s group executive, financial services, Steve Mickenbecker, said inflation was still below the RBA target range.

He added, “The RBA won’t want to see mortgage stress in highly leveraged buyers who bought at the peak of the then tear away Sydney and Melbourne markets. Inflation has not rescued them yet.

“Couple this with trade uncertainties triggered by the US and Brexit, credit tightening and property prices going south, now is no time to be making the long-awaited rate rise.

“Nonetheless borrowers can expect to see their home loan rates go up. If, as expected, the US Federal Reserve has four or five increases in 2019, higher funding prices will force the lenders’ hands.”