Westpac continue to expect the RBA to remain on hold until at least mid-2019

Readers of the Westpac Market Outlook publication for September will be aware that Westpac continues to forecast the cash rate to remain on hold out to mid-2019. Indeed we are not convinced that the cash rate will need to rise any time throughout the course of 2017, 2018 or 2019.

This approach is clearly different to the thinking of the Reserve Bank Governor himself who expects to be tightening over that period (note his speech on "the next chapter” which was delivered yesterday).

However, we continue to point out that the RBA has a very different growth outlook for the Australian economy and Australia’s trading partners to our own. The RBA expects growth in Australia to be 3.25% in 2018 and 3.5% in 2019 (above trend of 2.75%). Westpac expects a below trend pace of 2.5% in both years.

The RBA is also forecasting 2% underlying inflation in 2017 and 2018 (bottom of target band) to be followed by 2.5% in 2019. Underlying inflation is currently running at 1.8% (to June) and the upcoming revised weights are likely to reduce annual underlying inflation by 0.2-0.3%.

Going forward, the RBA’s inflation forecasts also look to be overly optimistic and are likely to be subject to downward revision. Recall that in 2016 when the RBA was forced to revise its inflation forecasts below 2% it believed it had little choice but to cut rates.

22 Sep 2017 - 09:35- Economic Commentary- Source: Westpac

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