More and more countries appear to be either in or at the beginning of the part of the interest rate cycle where rates are rising. The U.S raised its official rate from zero in late 2015 and has raised it another two times since the beginning of 2017. Canada, a country whose economy is often compared to that of Australia, raised its official rate in June and again this month. Australian economists now expect Australia to join the list of countries in 2018.
ANZ economists David Plank and Felicity Emmett have come out with a forecast of two 25bps (0.25%) increase in the cash rate in 2018. ANZ has slightly increased its growth forecasts despite lacklustre growth in household expenditures. Its expectation of inflation averaging more than 2% in the next twelve months has also increased. Perhaps the most important factor influencing the ANZ economists’ view is the RBA’s own language. ANZ has what it calls an “RBA Bias Index” and this index assesses RBA post-meeting statements. According to ANZ’s analysis, recent RBA statements indicate an unease with accommodative monetary policy. “The RBA’s own language seems to indicate increasing discomfort with the aggressiveness of its policy stance.”
What ANZ means by the “aggressiveness” of its policy stance is a cash rate which is negative in real terms. By “real”, economists mean adjusted for inflation. For example, the cash rate is currently 1.5%. There are different measures on inflation but if the consumer price index version is used, the last inflation reading was 1.9%. Thus the real cash rate is -0.4%. “We see the RBA tightening by 50bps in 2018. This would reverse the rate cuts of 2016 and take the real cash back to zero. After these hikes we see the Bank sitting pat in 2019 as highly-indebted households digest the impact of higher rates.”