HSBC: Reserve Bank could lift cash rate by mid-2018

Improvements to the mining sector and robust economic growth should see the Reserve Bank of Australia (RBA) lift the official cash rate by mid-2018, according to HSBC. 

In its Asian Economics report for Q1 2018, Paul Bloxham and Daniel Smith, economists at HSBC Australia, said the country’s economy is on a solid path to growth, with the latest national accounts indicating that GDP growth accelerated to a slightly above-trend rate of 2.8% year-on-year in the third quarter of 2017.

“The main force at work has been that mining investment is stabilising, after having fallen significantly in recent years. At the same time, growth in the non-mining sectors has remained solid,” they said.

“As conditions in the mining industry improve and the local labour market tightens up, we expect a modest pick-up in wages growth, which should, in turn, see the RBA begin to normalise its current very stimulatory cash rate setting in 2018. Our central case is for the RBA to begin to lift its cash rate from mid-2018.”

One key risk to HSBC’s forecast is the fact that wages could remain sluggish for longer than anticipated.

“This could occur if the effect of the cyclical lift in the economy and tightening of the labour market on wages growth and inflation are offset by the structural factors — such as offshoring, the changing nature of work and increased retail competition — to a greater degree than we are currently assuming,” they said.

The ongoing cooling of the housing market could also be a larger drag on growth than expected, with any pullback in Chinese household demand for Australian services presenting “considerable challenges” to HSBC’s growth forecast.