If the Australian economy improves above expectations, the first interest rate hike since November 2010 could be on the cards this year.
Treasurer Scott Morrison insists there are better days ahead because of the government’s economic management.
Last year saw the strongest jobs growth since 2015 and an unemployment rate which fell to its lowest level in four and a half years.
With most of the jobs being full-time, the government has reason to be upbeat about the prospects for 2018.
However, some economists are predicting an easing of jobs growth in the first half of the year, with a sharper slowdown in the second half, and this seems to be borne out by an increase in the unemployment rate on Thursday to 5.5 per cent.
It won’t be bad for all sectors – jobs in public sector construction will remain solid and improvement is expected in healthcare and mining.
Just how the economy performs, and what happens with inflation, will determine whether the Reserve Bank decides to hike interest rates.
The official cash rate has been at a record low of 1.5 per cent since August 2016.
RBA governor Philip Lowe said in a much-noted speech in November if the economy continued to improve as expected ‘it is more likely that the next move in interest rates will be up, rather than down’.
In a December speech, Dr Lowe kept to the central bank’s forecast of economic growth to be ‘a bit above three per cent’ in 2018 and 2019, supported by an improving world economy, low interest rates, strong population growth and increased public spending on infrastructure.
However, other economists are less optimistic, putting the growth figure at 2.5 per cent or slightly higher.
They note household consumption remains soft with household incomes growing very slowly and debt levels remaining relatively high.
Paul Dales, from Capital Economics, is one economist who believes a rate rise is not on the cards in 2018 – at this stage.
‘We don’t think the trigger will be pulled at all this year. Our view is the overall economy will do okay this year and grow by around 2.5 per cent and inflation will remain below the RBA’s two to three per cent target range,’ he told AAP.
However, he says there is a view among some economists that it takes 18 months to two years for changes to monetary policy to filter through into what happens in the economy, so any rate rise could be imposed sooner rather than later if the economy is showing signs of strengthening.
CommSec’s Craig James says the key issue in terms of an interest rate hike is whether the low growth rates of prices and wages persist.
‘The Reserve Bank is in no rush to change rates in any direction.’
He predicts the economy to grow by 2.5 to three per cent in 2018.
‘Despite the economy approaching its sustainable ‘speed limit’, inflation is expected to drift higher towards 2.5 per cent over 2018 but globalisation will continue to cap the growth of prices,’ he says.
The nature of the housing market ‘landing’ and how unemployment tracks will be key issues for 2018, he says.