Australian rate hike expectations wane - Westpac

Westpac released notes on their analysis of the Australian housing market, and the effect this could have on rate expectations from Australia's central bank.

• Inflation and the housing market are disappointing the Reserve Bank of Australia.
• weak inflation and housing pushes out expectations of a rate hike.

Key quotes:

• Inflation and housing have been the focus for Australia this week... The December quarter CPI report for Australia carried a high degree of importance given the market was close to fully pricing a RBA rate hike before year end. An upside surprise on core inflation would have cemented this expectation, but in the event, both core and headline inflation disappointed. The headline CPI rose 0.6% in Q4, with half of the gain coming from higher tobacco prices and the remainder fuel. There was little momentum elsewhere, the other CPI components netting out against each other.
•  The net effect is that core inflation will remain at or below the bottom of the RBA’s target band of 2.0%yr through 2018 (and 2019). This will see market expectations for a rate hike pushed further out from early 2019 currently. We remain of the view that the RBA will be on hold through 2018 and 2019.
• Like inflation, the housing market is also unlikely to justify tighter policy anytime soon. The latest price data from CoreLogic suggests home prices fell a further 0.5% in January to be down 1.0% since October (but still up 3.2% over the year)...An unfolding slowdown in housing credit and caution amongst households towards the sector indicate price growth is unlikely to accelerate meaningfully in 2018.
• While projects nearing completion will continue to add to supply, a renewed downtrend in dwelling approvals suggests that the flow of new supply will taper. Having surged 13% in November, total approvals slumped 20% in December to be 5.5% lower over the year.