The Economic View: The rates view for 2018

2017 was a ‘malting’ of the Reserve Bank as the Australian economic environment led the hawkish board members to shed their feathers and to become completely neutral.

Most economists suggested that the RBA was being overly optimistic with its growth and inflation targets at the beginning of the year.

And, as the year dragged on, it was clear that it was indeed ahead of the curve – downgrading its forecasts for both growth and inflation in the Statement of Monetary policy three times. The central bank finished 2017 forecasting core inflation will not breach its target band for the coming two years.

The economic environment has led to a full year of ‘no change’ to the cash rate, which has seen it equal the record for the longest period of no change in the bank’s history – 16 consecutive months – a record that will be broken in the first month of the new year.

This raises the question: when will the inertia in the cash rate be broken?

The answer lies in the statements from 2017 – it’s clear that the next move in the cash rate will be to the upside, as a frothy housing market and growth hovering just below 3 per cent would not justify cuts. (Plus, the RBA governor believes further stimulus will do little to improve the areas that are in need of assistance, and that other monetary policy levers should be used).

However, the biggest change in the statement in 2017 has been wage growth and the impact on inflation – the number one mandate of the RBA. There was a just a mild mention of wage growth at the start of the year. However, come August and the release of a record low wages growth figure for the second quarter, which was then backed by the October release of wages growth for the third quarter, remained near record lows.

Concerns around consumption and the impact of household debt levels turned into real issues. This fed into issues around inflation and the fact that, without housing, core inflation is anaemic – not the environment to be raising rates.

The RBA did finish the year on a positive note.

The December statement highlighted capital expenditure, exports and the outlook for growth as bright spots in the current environment. However, it is clear that, without inflation, rates aren’t changing anytime soon.