FXStreet (Bali) – Alex Joiner, Australia Economist at Bank of America Merrill Lynch (Australia), expects the RBA to keep policy rates on hold for an extended period of time before commencing a gradual tightening cycle in Q4 2016.
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After reviewing our expectations for the economic outlook in recent weeks, here we also now revise our forecasts for monetary policy. Our expectation is now for the RBA to keep policy rates on hold for an extended period of time before commencing a gradual tightening cycle in the fourthquarter of 2016. This will likely be followed by another hike in early 2017 and perhaps two more later that year – bringing the cash rate to 3.0%. This forecast assumes the Australian dollar keeps depreciating to US$0.73 by the end of 2015 and US$0.68 by the end of 2016.
While acknowledging downside risks to the cash rate in the short term, especially as the RBA itself holds a soft easing bias, we believe the hurdle for any further easing of policy is a high one. In any case, for equity market investors we wouldn’t expect that further rate cuts will be materially more supportive of domestic cyclical sectors, especially household consumption or the residential cycle, than current policy settings. Therefore, it seems more appropriate to consider when and by how much the RBA may tighten policy over the medium term.
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