Goldman Sachs on RBA: 60% probability seen of a November rate hike

Analysts at RBA provide their afterthoughts on yesterday’s RBA monetary policy decision, highlighting the shift in the RBA’s reaction function and probability of a rate hike by end-2017.

Key Points:

Financial imbalances in the Australian economy—in particular, acceleration in prices and speculative activity in the property sector—have intensified, and the RBA’s new Governor has confirmed a shift in the Bank’s reaction function to be both more responsive to these imbalances and less sensitive to low inflation.

In this note, we consider Lowe’s thesis on “using higher interest rates to help contain financial excesses”2. Guided by his earlier research, we create a proxy for financial stability and apply it in aTaylor rule framework.

We consider Lowe’s thesis on “using higher interest rates to help contain financial excesses” guided by his earlier research, we create a proxy for financial stability and apply it in aTaylor rule framework.

While our conclusions are not intended to be directly prescriptive, formalizing the way that we think about financial imbalances and the RBA’s evolving reaction function has hawkish implications overall.

We are changing our cash rate forecasts and now see a November 2017 rate hike as more likely than not (60% probability), placing us at the hawkish extreme of consensus expectations and implying materially more tightening than is currently priced into financial markets (+2bp) by end-2017.