RBA: Change of regime – Goldman Sachs

In view of the analysts at Goldman Sachs, 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.

Key Quotes

“To date, several years of macroprudential initiatives have been the “first line of defence” against these imbalances; however, Governor Lowe is on record cautioning that macroprudential approaches “may be less than fully satisfactory”, and in our view it is likely that alternative approaches are now being seriously entertained.”

“Overall, we find that this shift in the RBA’s reaction function could reasonably lead to an end-2017 cash rate ~15-25bp higher than under a traditional policy rule—given plausible weights which we think the RBA is placing on financial stability. Should imbalances remain elevated, the models suggest a more aggressive and sustained policy tightening will be required.”

“While our conclusions are not intended to be directly prescriptive, formalizing then 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.”