Chief economist update: Next move in rates will likely be up, but it's not certain

"You may have noticed that at yesterday's meeting, the Reserve Bank Board left the cash rate unchanged at 1.5%, where it has been since August 2016."

This is what RBA Governor Philip Lowe told his audience at the Australian Financial Review Business Summit in Sydney yesterday.

Not only did we notice it gov, we expected it! But perhaps not very many noticed that while it was not a cut and paste job, the message contained in the monetary policy statement of 6 March 2018 echoed that made in March (even February) last year - that of expectations of stronger growth, improving labour market and business investment and gradually rising inflation.

The RBA head stressed the same in his Sydney outing while at the same time offering forward guidance: "With the economy moving in the right direction, and interest rates still quite low, it is likely that the next move in interest rates in Australia will be up, not down."

But the economy was also moving in the right direction in 2017 - GDP growth strengthened from 1.8% in the year to the March quarter to 2.9% in the September quarter (we'll get the December quarter update later today); the unemployment rate improved from 5.7% in January 2017 to 5.5% in the same month this year; business confidence and conditions are stronger; so too is capex, actual and expected.

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These were reasons enough for both the ANZ and NAB to expect the Australian central bank to lift the official cash rate twice this year. In September 2017, the AFR printed that the ANZ "forecast the cash rate will be lifted by 0.25 percentage points in May, followed by another hike of the same size in the second half of the year" and NAB predicts "25 percentage point interest rates hikes in August and November next year."

Fast forward to 2018 and both banks have changed their tune - no rate hike this year for the ANZ and only one (in November) for NAB - and justifiably so.

For growth in wage remains sluggish - up 2.1% in the year to the December quarter from 2% in the previous quarter - indicating continued low inflation and weak consumer spending.

The annual growth rate in core inflation - using the average of trimmed mean and weighted median measures - remained below the bottom of the RBA's 2% - 3% target band (1.9% in the December quarter). The headline CPI grew by 1.9% over the same period.

Not only that, as the RBA pointed out once again in its March statement: "One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high."

The latest retail sales report released by the Australian Bureau of Statistics (ABS) indicates that the weakness in spending persists at best and worse, it's slowing.

While retail sales increased by 0.1% in the month of January after dropping by 0.5% in the previous month, this was way below market expectations for a 0.4% increase. More worrying, the annual growth rate in retail spending remained in a trend deceleration, slowing to 2.1% from 2.5% in December and 2.9% in November 2017.

Just as I scribbled on this page back in October 2017; "Faced with record high household debt, sluggish wages growth (zero real wages growth), rising utility costs, decreasing disposable income and dwindling savings, the Australian consumer has no choice but to cut back on spending..."

Add to this the increased volatility on Wall Street and Trump's foray into protectionism and it won't be hard to contemplate that the "no RBA rate hike this year" calls could turn into rate cut expectations.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

His latest book, The Good Economics Guide: Making sense of key economic data, is available free to download on the Financial Standard app.

Read more: AustraliaANZNABAustralian Bureau of StatisticsAustralian Financial Review Business SummitCPIRBA Governor Philip LoweTrumpWall Street
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