Chief economist update: RBA certain to raise interest rates

Speculate no further, "the next move in the cash rate will be up, not down."

Reserve Bank of Australia (RBA) Governor Philip Lowe cannot be more explicit about monetary policy direction than this when he addressed the Australia-Israel Chamber of Commerce (WA) in Perth yesterday.

Perhaps, Lowe is itching to experience the kind of power the RBA Governor holds with even a minor tweak in interest rates for the official cash rates had been stuck at a record low 1.5% since August 2016 - one month before he assumed office as RBA head on September 18 of the same year.

But nah, Lowe is a highly educated and honourable man. The rationales he put forward are all rational.

The RBA governor underscored four themes underpinning the Australian central bank's perspective on the domestic economy's cyclical progress:

"The first is the strong growth in employment."

"The second theme is a pick-up in non-mining business investment."

"The third theme is an improvement in business conditions, as reported in surveys."

"The fourth theme has been slow growth in wages."

While the RBA "expects a further pick-up in the Australian economy", "There are, though, some uncertainties around this outlook, with the main ones lying in the international arena. A serious escalation of trade tensions would put the health of the global economy at risk and damage the Australian economy."

"We also have a lot riding on the Chinese authorities successfully managing the build-up of risk in their financial system. Domestically, the high level of household debt remains a source of vulnerability, although the risks in this area are no longer building, following the strengthening of lending standards."

I don't think anyone could argue with any or all of these assessments. But for the "fourth theme", 2017's expectations for two rate hikes this year would have been right on target. These expectations were later lowered to one rate hike and then to nil and then to maybe next year.

Governor Lowe would need to be more patient in experiencing the thrill of moving the cash rate "up" for in his own assessment: "It is still some time before we are likely to be at conventional estimates of full employment. And, given the structural forces also at work, we expect the pick-up in wages growth and inflation to be only gradual."

"...because the progress is expected to be only gradual, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy."

At least we learned from John Maynard Keynes what long-term is: "in the long-run we're all dead" but how long or short is "near-term"?

My guess is that the "near-term" would be as long or as short a time it takes for wages growth to significantly pick up and lifts inflation up to the RBA's 2% to 3% target.

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.

Read more: Australia-Israel Chamber of CommerceJohn Maynard KeynesPerthRBA Governor Philip LoweReserve Bank of Australia
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