The Reserve Bank of Australia is on track to break its record for the longest spell of cash rate inertia, with most major economists forecasting the central bank will sit on its hands well into 2015.
RBA governor Glenn Stevens said in the statement accompanying Tuesday's rate decision that "the most prudent course is likely to be a period of stability in interest rates," despite the Australian dollar being stuck in the tight trading range between US92¢ and US93¢. The statement had sparked market speculation about when the "period of stability" will end.
Economists agree that the next move by the central bank will be a tightening of monetary policy. But they have produced wildly varying forecasts for the timing of that move from as early as February 2015 (Commonwealth Bank of Australia) to as late as the first quarter of 2016 (Bank of America Merrill Lynch).
At the monthly board meeting on Tuesday, the central bank kept the cash rate on hold at 2.5 per cent for the 12th consecutive meeting, marking the longest period of steady rates since 2006.
The longest the Reserve Bank has kept interest rates on hold was more than 18 years ago, when the central bank kept the rates at 7.5 per cent for 17 consecutive meetings between February 1995 and July 1996. If the central bank were to match that record, that would imply no change to current settings until April next year, matching most analyst forecasts.
A number of financial houses have cast their votes on an interest rate rise in early 2015, with CBA and Barclays leading the way.
On CBA's analysis, the interest rate rise could be as early as February 2015.
"The RBA has been too pessimistic on growth and too optimistic on inflation," CBA economist Diana Mousina said.
Ms Mousina said there were a "large stockpile" of potential projects that could receive approval, including a number of L&G projects in Queensland.
She also said the RBA overestimated how much the removal of the carbon tax will take out from the downgraded inflation forecast.
But the housing bubble is not frothy enough to be a key consideration for an interest rate rise, Ms Mousina said.
On CBA's forecast, the Australian dollar is forecast to reach above the market forecast at US94¢ by the 2014 end.
Middle of the ground
ANZ, UBS and HSBC predict the hike will be in the second quarter of 2015, while JP Morgan and Westpac forecast August next year.
On JP Morgan's analysis, the rate hike will not kick in until August 2015 despite the high exchange rate.
"The domestic economy is underperforming...but we doubt it is soft enough for the RBA to contemplate a rate cut in the near term," Stephen Walters, JP Morgan's chief economist, said in a note.
"Nor does the elevated Australian dollar justify easing at this stage – the RBA has other tools in its kit to deal with currency strength.
"Similarly, we suspect officials are wary that a rate cut now would add to growing signs of frothiness in the housing market."
On UBS's forecast, the central bank is expected to raise the interest rate to 2.75 per cent in May 2015 and to 3 per cent in June 2015 as the labour market recovers. But until then, the interest rate is likely to remain static.
"It is the most boring central bank in the world for the market," reckons UBS interest rate strategist Andrew Lilley.
Bank of America predicts the Reserve Bank will raise the cash rate in the 2016 first quarter, which would see the interest rate being on hold for two and a half years. NAB and RBC Markets are betting on a rate hike in late 2015.
"Historically the Reserve Bank has never initiated a cycle of raising rates until after unemployment has clearly peaked," Bank of America Merrill Lynch chief economist Saul Eslake said.
The monetary policy decision on Tuesday indicated the central bank's concern for a slack labour market, Mr Eslake said.
"They (the RBA) conceded for the first time there was certain degree of slack in the labour market.
"[The] unemployment rate is a key indicator of the amount of slack spare capacity in the economy."
Mr Eslake predicted the unemployment rate to peak in late 2015 in the 6.5 and 6.75 per cent range.
On BoA numbers, the local currency is expected to plunge to US80¢ by the 2015 year-end on the back of falling commodity prices, the completion of construction work in resources and LNG projects and the US Federal Reserve lifting interest rates.
RBC Capital cast its vote on a rate rise in the fourth quarter of 2015.
"As long as there are signs of policy traction, particularly in housing, rate cuts are unlikely," RBC Capital head of strategy Su-Lin Ong said in a note.
"But, the modest rotation of growth, degree of labour market slack, and well-behaved inflation outlook suggest rate hikes are also not on the agenda."
Ms Ong said any rate change was likely to be on the sidelines for the foreseeable future, given accommodative settings for growth and limitations of monetary policy.
Economists' snap shot: When will the "period of stability" end?
CBA: First hike will be in February.
TD Securities: Expect a rise in March.
Barclays: RBA will start "to raise rates in Q1 2015 as the economy improves and with the cash rate at 3.5 per cent by the end of that year".
HSBC: hike in June quarter of 2015, "though much depends on the [Aussie dollar] outlook".
ANZ: Tightening cycle begins in May 2015.
JP Morgan: "First step along the road to policy normalisation in August next year".
Westpac: "Our official forecast is for a 25 basispoint increase in the cash rate at the board meeting in August next year."
RBC Capital Markets: "Given a number of cyclical as well as structural challenges, we remain comfortable with our view for an extended period of steady cash at 2.5 per cent until [the fourth quarter] 2015".
NAB: The bank "still expects the next move in the cash rate will be up, but not until late 2015".
BoA: "Our forecast remains for policy to be tightened in [the first quarter of] 2016"Author: Misa Han
Source: The Age