In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.
For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.
That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.
My updated profile for RBA rates is:
May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%
The risk is for rates to 0.5% in very late 2019 or in 2020
It will be driven by:
- Underlying inflation remaining below 2%
- GDP growth around 0.25 to 0.5% per quarter in 2019
- Annual wages growth stuck at 2.5% or less
- Global growth slowing towards 3%
- Labour market under-utilisation around 13 to 13.5%
There are likely to be other influences, but these are the main ones.
AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.
