Australia: RBA to be on hold during 2017 - HSBC

Paul Bloxham, Chief Economist at HSBC, analyzes the potential impact on households of higher commodity prices. They see the RBA on hold during 2017. 

Key Quotes: 

“The tailwind is here. Higher commodity prices are boosting national incomes and the numbers are large. Export values rose by a strong 32% y-o-y in December which drove the largest trade surplus on record. This is driving a strong rise in mining profits and tax revenues. The debate is about whether the lift in mining profits and taxes will boost wages growth, household spending and domestic inflation, as it has done in the past. Will households feel the tailwind too?”

“Some observers argue that without another mining investment boom or the government delivering personal tax cuts, both of which, we agree, seem unlikely, a rise in domestic wages and inflation will not happen.”

“Although we agree that the income effect on households is likely to be less potent than in the past, some of the effect should still get through. Plus, this boost is in addition to the services sector growth story which is still humming along. We think this will keep the RBA from cutting further and expect that these same forces could mean rate hikes in 2018.”

“Rising unit labour costs should be enough to support a modest lift in domestic inflation. In our view, the RBA only needs to be convinced that underlying inflation is past its trough to keep them from cutting. With this, we expect the RBA to be on hold through 2017 and to lift its cash rate in 2018.”