Needless to say the main focus for financial markets last week was the US rates decision. The script may only have been written a week ago but the US Federal Reserve stuck to it, delivering a 25 basis point US rate hike last week – universally expected after a run of strong data and pretty clear warnings in speeches. They also left their median forecasts of 2 additional rate hikes this year and three hikes in 2018 unchanged.
Locally, there have been a number of commentators arguing that the RBA will be forced to raise interest rates to attempt to slow very strong house price growth. However, the RBA Governor has recently stated that he would prefer unemployment to come down more quickly and inflation to return to target but is more concerned about the financial stability considerations of too rapid an increase in household debt, to consider reducing rates further.
Following last week’s rise in the unemployment rate, any expectations of an RBA rate increase were unwound by the market and the cash rate is now forecast to be 1.50% for the rest of this year.