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Interest rates (the cash rate is set by the RBA – the rate we pay is the cash rate + the bank’s profit margin) are ultimately set by the Reserve Bank of Australia – so the best answer is to read and listen to what the RBA is saying. They are constantly sending signals as to which way they believe they will go, albeit somewhat obliquely.
At yesterday’s meeting, the RBA decided to leave the cash rate unchanged at 1.5%, which is where it has remained since August 2016. According to RBA Governor Philip Lowe, this is because “the economy is moving in the right direction.”
In all recent statements, the Governor has noted: “the Bank’s central forecast for the Australian economy is for GDP growth to pick up to average a bit over 3% over the next couple of years”. This is confirmed in the official forecasts from the February Statement on Monetary Policy of 3 ¼ per cent in 2018 and 2019. In the most recent statement, the RBA’s major forecast is for “the Australian economy to grow faster in 2018 than it did in 2017.” Consumer spending is expected to increase, but highlights it as a “continuing source of uncertainty.” Wage growth remains low, increasing from 2% in the September quarter to 2.1%, and commentary about the housing market has changed, especially in regards to Melbourne and Sydney, which are now described as “having slowed.” The Australian dollar “remains within the range it has been in over the past two years”, and the global economy “has strengthened over the past year.”
Stronger growth is expected though, in 2018 than in 2017, and the unemployment rate is expected to further reduce. Inflation is also expected to increase somewhat, so it is likely, according to Lowe, that “the next move in interest rates in Australia will be up, not down.” Having said this, the expected progress in having inflation return to target and reducing unemployment is likely to be gradual, so the RBA is unlikely to see a strong case for a near-term adjustment of monetary policy.
Something else to note is that Westpac has been consistently critical of the RBA’s GDP growth forecasts for 2018 and 2019 of 3 ¼ per cent in both years, as they have argued that it will be more in line with 2.5%. Chief Economist for Westpac, Bill Evans, said that “The Reserve Bank appears to be less confident about the growth outlook. Nevertheless, we still believe that it expects to be raising interest rates beginning sometime in late 2018 and into 2019. That would be in line with current market pricing. In contrast, Westpac is not surprised to see the Bank more cautious on the growth outlook and we continue to expect that the cash rate will remain on hold in 2018 and 2019.”