Thursday , February 25 2021

The Bank of Australia now thinks Australia's economy will grow even more, but the financial markets are skeptical



The Australian Central Bank (RBA) estimates that the Australian economy will continue to roar next year, indicating an average annual growth rate of 3.5%, above the 3.25% average growth rate just three months ago.

Significantly, this will leave GDP growth well above the 2.75% rate that many see as a trend, the level of growth in which unemployment and inflationary pressures are stable.

With the expected rolllick growth together, it helps explain why the RBA also sees unemployment falling below 5% by 2020, and inflation returning to its annual 2-3% target.

In combination, it sounds like the bank is becoming more than half glass full on prospects for Australia's economy, potentially paving the way for an early rise in interest rates than many expect today.

However, the reaction of the financial markets to the November statement of the RBA policy indicate that they are not completely convinced.

The Australian dollar and the 2-year Australian government bond yields – two types of assets sensitive to changes in interest rate expectations – barely gained a response.

Here is a chart of AUD 5 / AUD.

And a 5-minute graph of yields on 2-year government bonds.

While there are some major events in the market, including mid-US elections later today, lack of motion suggests there is a certain degree of skepticism about the predicted changes marked by the RBA.

They do not buy it, literally.

And as we've seen in the following chirp, it's not just markets that make the RBA think exactly what the RBA thinks.

Like Bill Evans of Westpac, other economists have questioned whether RBA's expected growth path is realistic.

"The upward adjustment to the RBA's growth and inflation forecasts suggests that the bank is approaching a tightening policy, but we still think that the slowdown in the housing market will lead to slower growth for a long time and maintain our prediction that the first interest rate hike will occur only by the end of 2020, Dales of Capital Economics.

Shane Oliver of AMP Capital suggested that the RBA did not correctly assess the mood for the economy in the coming years.

"The RBA appreciates the threat posed by slowing growth in China, tightening credit conditions and the negative impact on wealth as house prices continue to fall, especially in Sydney and Melbourne where we expect a top-down fall of 20% by 2020," he said.

"As a result, and in contrast to the RBA, we see slower growth to 2.5% -3% by 2019 than the RBA's expectations for a 3.5% growth which will lead to an increase in unemployment and maintain lower wage growth and inflation for longer than The RBA ".

Now Watch: Money Markets videos

Business insider emails and alerts

The website highlights every day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.


Source link