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.”
If a borrower pays interest at less than the rate of inflation then it is a good deal for the borrower and a poor deal for the lender. By having a negative real cash rate the RBA hopes to make borrowing more attractive and saving less attractive. (This is a simplified explanation but it captures the essence of the policy.) Negative real interest rates occur from time to time but they are typically temporary in nature and mostly arise when a central bank seeks to stimulate an economy until its growth rate rises.
ANZ is not the only major bank to anticipate a more hawkish RBA in 2018. In August, NAB’s Group Economics team, headed by chief economist Alan Oster, did not expect any rate rises in 2018. Now their view is quite different. “We are pencilling in rate rises of 25bps in August and November of 2018 and a further two 25bps hikes in 2019.” Westpac is still officially forecasting no rises until 2019 while Commonwealth Bank is forecasting a rise “late in 2018.” Cash rate futures have one August rise fully priced in and another partially factored in for November 2018.
The ANZ team has hedged its bets a little as they are open to the possibility of a future event which derails their forecast. A rise in the local currency to 90 U.S. cents is one future event. A fall in Australia’s core inflation rate is another. ANZ has left room for a retraction or deferral of their forecast, which is quite reasonable given offshore disturbances have been the source of economic disruption since the 1990s.