Market conditions warding off RBA hike

05 October 2018

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Fitch Ratings has maintained that sluggish improvements in the unemployment rate, stagnant inflation and exchange rate depreciation would deter the central bank from lifting the cash rate any time soon.

Following the Reserve Bank of Australia’s October cash rate decision, Fitch Ratings has said that it expects the central bank to keep the cash rate on hold in 2018 and has predicted a hike in the back end of 2019.

Fitch noted that while the RBA maintained a positive outlook in its statement on monetary policy, weaker than expected economic conditions would prolong the cash rate hold.

“Although the statement showed that the central bank had a positive outlook on the economy, it maintained its view that unemployment would only fall towards the 5.0 per cent level ‘over the next couple of years’ and inflation would be higher than 2.0 per cent only in 2019 and 2020,” the ratings agency stated.

“We expect consumer price inflation (CPI) to gradually rise within the central bank’s 2.0 to 3.0 per cent target range in 2019.

“Additionally, although we expect growth to ease to 2.5 per cent in 2019 from 3.0 per cent in 2018, the still resilient growth outlook should be supportive of job creation over the economy.

“As such, we believe that the RBA will be able to raise its cash rate by 25 [basis points] to 1.75 per cent by end-2019.”

However, Fitch also flagged upside and downside risks to its cash rate outlook, making reference to change in domestic and foreign market conditions.

“On the upside, a spike in global oil prices as a result of the US-directed Iranian sanctions and supply concerns in Venezuela could lead to an acceleration in inflation, forcing the RBA to hike rates at a faster pace to curb inflationary pressures,” Fitch added.

“On the downside, the RBA continues to note that wage growth remains low and may want to see stronger signs of wage growth even after unemployment declines towards 5.0 per cent. This could see the central bank delay hiking rates to support the economy so as to achieve higher wage growth.

“US-China trade tensions could also worsen, posing headwinds to Chinese demand for Australian exports, weighing on economic growth, and prompting the RBA to remain on hold for longer.”