MNI ANALYSIS: Market Could Challenge RBA Next Move Up Guidance

--Call By Closely Watched Economist Could Impact Rate Hike Pricing

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's guidance has been a key

influence on both the money market and economists' forecasts over recent years,

but one economist has the potential to change this dynamic.

     That person is Westpac's chief economist Bill Evans.

     Evans's influence comes from the circular relationship between market

pricing and central bank outcomes. On one hand, central banks use forward

guidance to steer market expectations. On the other hand, they rely on market

prices to gauge the likely path of the economy and the stance of monetary

policy.

     The two-way flow is not perfect, but as the market becomes less and less

convinced that the RBA will achieve its forecasts, the more it is likely to

react to a significant change in forecast by a leading economist.

     Since 2011 when he surprised everyone with a rate cut call when the next

move in the cash rate was widely expected to be up, Evans has widely been

regarded as the premier forecaster of the RBA cash rate.

     Following the RBA's last rate cut in August 2016, Evans' forecast was then

for the rate to remain on hold until end-2017. The following year he extended

the hold period to 2018, and last year to 2019. He currently has no forecast

beyond that period.

     --FORECAST UPDATE

     But sometime between now and November, Evans will extend the forecast

horizon to end-2020.

     The question is: Will he forecast a hike in 2020? Will he extend the hold

period to end-2020? Or will he entirely change his forecast and call for a lower

cash rate in 2019 or 2020?

     Whatever Evans does, one thing is certain: It will have an influence on

money market pricing, and that could in turn lead to changes in other

economists' forecasts. 

     What is also certain is that market pricing impact will be the greatest if

Evans' shifts his forecast to a cut, and that risk is real based on his

published view that the RBA is more optimistic than he is.

     According to Evans, a gradual return to "normal conditions" has been the

RBA theme in many recent statements, and continued in the Statement on Monetary

Policy published earlier Friday.

     But from his perspective, "weak wages growth, a slowdown in employment

growth, and potential negative wealth effects loom as more significant risks" to

the forecasts than the RBA appears to be prepared to accept, at least in the

statement.

     --SLOWER GROWTH

     Significantly, Westpac expects growth in the key policy year of 2019 to be

only 2.5% compared to the 3.25% anticipated by the RBA, as they see larger

risks, amongst others, around the household sector and China.

     According to Evans, there is a clear sense from the RBA that there is no

particular urgency to change the policy stance, and he too is sticking to the

view that the cash rate will remain on hold through the remainder of 2018 and

2019.

     That view is applicable as of now. 

     But as Evans works through the forecast, when he extends the horizon to

end-2020, and given the gap in optimism between himself and the RBA, it is

possible that he might conclude the economy needs a lower cash rate to support

consumption.

     A rate cut forecast could lead to the money market increasing bets for an

RBA cut especially given the continued market push back on rate hike forecasts.

     Or he could forecast cash rate on hold for longer -- until the end of 2020,

maybe pushing markets to further extend the timing for a first hike. Currently,

money markets are pricing just a 28% chance of a 25bps hike by September 2019.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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