Fitch rating agency predicts RBA to raise cash rate by 25bps this year. It also predicts another 50bps hike next year in 2019.

What Fitch observed is that RBA appears comfortable lagging behind other central banks in tightening policy, allowing exchange rate flexibility to serve as a buffer”. This is in-line with what RBA Governor Stephen Lowe has repeated a couple of times. That is, RBA didn’t cut as deep as other global central banks. And therefore, it also doesn’t need to reverse that cycle as others like Fed and BoC.

But Fitch expects Australia economy to gain further momentum this year with growth holding steady at 2.7% in 2019. That’s thanks to “strong terms of trade on income, broadly accommodative financial conditions and buoyant prospects for investment”.

RBA Deputy Governor Guy Debelle:-

• “Equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation.”
• “There is little priced in for the risk that this may not turn out to be true.”
• Market volatility in February, was just “a small example of what could happen following a larger and more sustained shift upwards in the rate structure.”
• He admitted before wrong in predicting higher volatility before, but added “I think there is a higher probability of being proven correct this time.”

More economists are paring back their expectation of an RBA hike this year. Macquarie Bank now no longer sees RBA hiking within 2018. it noted in a report that “the primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target.” .

It referred to other advanced economies for the pattern of falling unemployment rates without wage growth. At this same time, “Australia’s unemployment rate remains at 5.5% and noticeably above ‘full employment’.” Also, “after two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.”

Besides, “housing has settled”, and “investor activity in the housing market has subsided significantly and housing prices have broadly flattened out. There is “little danger” or “reacceleration in housing price or credit growth.” And therefore, “the source of much angst for the RBA — fast growth in housing prices in Sydney and Melbourne – has eased.”

NAB recently pushed back their RBA rate expectation too and predicted only one hike this year, not two. Westpac continued to expect no hike until 2019.