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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
     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:
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]

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