Firstly, welcome to 2014. I hope all readers had a relaxing Christmas break and return to work rejuvenated.
The economic data flow has begun the New Year on a positive note and there are signals that the transition to non-mining led growth is proceeding as the low interest rate environment continues to work its way through the economy.
When it comes to interest rate expectations for the coming year, there is, not surprisingly, some divergence among forecasters. As we know, the current cash rate sits at 2.5%, and when forecasting its position at the end of 2014, expectations among economists range from 2.0% to 3.5%. While some economic indicators, such as confidence measures and housing indicators, are pointing to a pick-up in activity, others such as business investment and consumer spending, suggest it will be another sub-trend year of growth.
With slower employment growth, and rising population growth, the unemployment rate is expected to continue to trend higher. But how high it goes, and when it starts to turn, is perhaps the most important issue for the RBA’s policy decision outside the currency.
The chart above shows the distribution of the cash rate forecasts for December 2014. Of the 30 institutions surveyed by Bloomberg, 13 see the cash rate rising through 2014, six see it falling, and 11 have it unchanged.
Jawboning by the RBA is likely to continue to try and push the currency lower and into their preferred range of mid-80’s, especially while inflationary pressures remain so soft. If the Australian Dollar remains “high” (above 90 cents), there will be increased expectations of another rate cut by the RBA to push the currency lower.