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Interest Rate Increase Delayed until Mid-2019?
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NAB delays first rate hike until mid-2019
The National Australia Bank has released a statement saying that interest rates are not expected to increase now until mid-2019. Great news for just about everyone except for those with money in the Bank (and wanting to earn interest)!
We have to agree with them. With CPI well within the bottom of the RBA’s target band and wage growth very subdued, it is difficult to see any significant pressure in the economy that will drive inflation. The reality is that the greatest risk to the Australian economy at this time is external factors – be it a US v China trade war, an unhappy China punishing Australia, or political tensions on the Korean peninsula or perhaps in the Middle East.
The key points from the NAB statement were:
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NAB has delayed the timing of when we expect the RBA to start a gradual interest rate hiking cycle.
The change reflects the fact there is no sign as yet of stronger wages growth and unemployment has been stuck at around 5.5% for the best part of a year.
While still very data dependent we now have the start of a gradual rate hiking cycle in mid-2019.
We still expect the economy to strengthen, leading to a declining unemployment rate. This should eventually translate into stronger wages growth and give the RBA confidence that inflation will track back to its 2.5% target. However, we acknowledge there is considerable uncertainty around the timing at which wages growth will strengthen, and the time of the RBA’s next move will remain highly data dependent.
Markets are starting the week with news that the US and China appear to have agreed to cease trade hostilities, with China reportedly committing to purchasing more US agricultural goods and energy, in an attempt to reduce the bilateral trade balance. (Both are significant exports by Australia to China). The $A is relatively supported as EUR weakens due to Italian political concerns and the JPY weakens as the correlation with rising US yields re-establishes. Despite a pullback at week’s end, longer-dated yields generally remained under upward pressure last week.
This week is a relatively quiet one for Australian events, with Construction Work Done on Wednesday (a partial for Q1 GDP due in early June) the only first tier economic release. We are fractionally above market – the key interest will be the extent to which non-residential construction and infrastructure spending are offsetting a slight moderation in residential construction. Anecdotally, infrastructure spending is becoming more material for the economy.
There are also two RBA speeches – both after Australian market hours. The Governor speaks Wednesday evening on “Australia’s Deepening Economic Relationship with China: Opportunities and Risks”, while Assistant Governor Bullock is speaking at a Housing Market seminar in Holland on Friday night.
Offshore, it is also a less hectic calendar, though there will be interest in the FOMC minutes (on Wednesday evening) – along with various Fed speakers throughout the week. The key statistic release of the week is likely to be the European PMIs on Wednesday, with much debate about whether European growth is slowing or largely reflected very cold weather in April. There will also be continuing interest in developments in Italian coalition discussions, which have been impacting on European bond yields.