Eyes on Aussie economy for the Asian session - Westpac

Eyes are on the Aussie economy tonight as we head towards the Asian session and Aussie CPI and the higher AUD will impact the perceived risks around the Bank’s inflation and growth forecasts. 

Key Quotes:

"The higher AUD will impact the perceived risks around the Bank’s inflation and growth forecasts. 

As the minutes point out, financial market pricing for RBA policy has “shifted to indicate some probability of an increase in the cash rate by mid-2018”. The most important development behind this outlook is the improved conditions in the labour market. 

The implications for policy from the housing market are less clear. The macroprudential policies have already resulted in higher mortgage rates, and as noted in the minutes, pressures in the housing market appear to be easing. Recall that the Bank’s current forecasts for GDP growth in 2018 are an above trend 3.25%. 

That contrasts with our own forecast of only 2.5%. Our forecasts envisage ongoing caution from the consumer; no significant recovery in non-mining investment and detraction in growth from housing construction. 

Furthermore, the growth profile which we described is unlikely to be consistent with sustained improvement in the labour market. The short-term outlook for employment growth is positive. 

However we expect that, around year end, the unemployment rate will turn and will edge back towards 6% over the course of 2018. Despite a more confident Bank and its decision to set out its new so-called “neutral target”, our forecasts remain consistent with the cash rate staying on hold throughout 2017 and 2018. 

Furthermore the evidence, particularly around the housing market, suggests that “neutral” is closer than 200 basis points away."