Last Remaining Voice For Cut, JP Morgan, Now Sees RBA On Hold

--But JP Morgan's Auld Still Sees Risk of Lower Rates If Growth Disappoints

By Sophia Rodrigues

     SYDNEY (MNI) - JP Morgan analysts have revised their outlook for the

Reserve Bank of Australia cash rate, no longer forecasting a further cut and now

expecting the rate to remain on hold for longer but with risk still to the

downside.

     With this change in view, none of the 21 analysts in an MNI survey expect

the cash rate to go below the current 1.5% level. Several expect the first rate

hike in 2018 while some expect the cash rate to remain on hold in both 2018 and

2019.

     Prior to this, JP Morgan's forecast was for two cuts in the cash rate in

the first half of next year.

     In terms of timing, Goldman Sachs, HSBC and Bank of America-Merrill Lynch

are the most hawkish, forecasting the first rate rise in the first quarter next

year.

     Among the big four Australian banks, ANZ expects the first hike in May

2018, following by National Australia Bank in August and Commonwealth Bank in

November next year. Westpac is alone among the big four to see the cash rate on

hold until at least end-2019.

     In a note published Monday, JP Morgan analysts led by Sally Auld

acknowledged they have been wrong in their call for further easing.

     At the same time, the change is view in not a result of an upgrade in view

on the economy, rather it is an acknowledgement that the RBA is now more

patient.

     "The RBA's reaction function has changed, such that it is willing to

tolerate a longer period of sub-target inflation in order not to increase risks

to household balance sheets. This shift in focus has been made easier by strong

global growth outcomes, despite domestic growth running below trend in 2016/17.

So policy on hold for the foreseeable future now appears to be the most likely

path for the RBA cash rate," Auld wrote in the note.

     Auld warned that the market is underestimating the RBA's sensitivity to

even a modest deterioration in cyclical conditions and that the high levels of

household debt have the potential to amplify the impact of any negative shock.

     "All this leaves us with a bias to think that the RBA is on hold for the

foreseeable future, with the risk of lower rates at some point if growth

disappoints," Auld wrote.

     The money market is pricing in close to a 64% chance of a 25bps hike in May

2018, down slightly from 70% pricing last Friday.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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