Westpac's Evans Sees RBA Cash Rate on Hold Until End-2019

--Evans Remains Lone Voice Among Big Four Banks to Predict No Hike in 2018

By Sophia Rodrigues

     SYDNEY (MNI) - Westpac chief economist Bill Evans issued an updated

forecast on the Reserve Bank of Australia on Friday, not only refusing to join

the other three big Australian banks in forecasting a cash rate hike in 2018 but

also extending to the end of 2019 the period during which the RBA would remain

on hold.

     "We are not convinced that the cash rate will need to rise any time

throughout the course of 2017, 2018 or 2019," Evans said in a report published

Friday.

     Earlier this week, ANZ was the third of the four big four Australian banks

to forecast the first RBA hike in 2018, in May. National Australia Bank is

forecasting a hike in August and Commonwealth Bank in November next year.

     Evans acknowledges his thinking is clearly different to that of RBA

Governor Philip Lowe "who expects to be tightening over that period (in the next

two years)"

     But he thinks the RBA's growth and inflation outlook is more optimistic

than his own.

     The RBA expects Australian growth of 3.25% in 2018 and 3.5% in 2019, above

the 2.75% trend, while Westpac expects a below trend pace of 2.5% in both years.

     "Going forward, the RBA's inflation forecasts also look to be overly

optimistic and are likely to be subject to downward revision," Evans said.

     Given the global lessons on the structural wages outlook, Evans also sees

it as  unlikely that wages in Australia, where spare capacity is higher than in

other developed economies, will rise significantly, even in the medium term.

     According to Evans, the weak wages performance has lowered annual real

income growth to 0.6% while real consumption growth has held around 2.5%,

leading to a fall in the household savings rate.

     "Households will need to protect that fragile savings rate and pressures

will emerge on consumer spending," he said, noting there are other pressures

impacting households like rising energy prices, record high debt levels and

political uncertainty. 

     "The latter [political] effect will work through the business sector as

businesses restrain employment and investment until political clarity is

achieved following the 2019 election," he added.

     Among others in a MNI survey, Goldman Sachs, HSBC and Bank of

America-Merrill Lynch are the most hawkish, forecasting a rate rises in the

first quarter next year.

     JPMorgan is still forecasting rate cuts -- two reductions in the first half

of 2018. 

     The money market is pricing in close to a 70% chance of a 25bps hike in May

2018, down slightly from near-80% pricing two days ago.

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

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