The latest from Robert Mead, managing director in PIMCo's Sydney office and co-head of Asia-Pacific portfolio management
Outlook for Australia:
- the future may not be as rosy
- PIMCO's base case calls for Australia to keep growing moderately over the next three to five years
- In a range of 2% to 3%
- With inflation well contained in the 1.5% to 2.5% range
- On a positive note, Australia's sovereign balance sheet is relatively healthy, and its credit rating was recently affirmed at 'AAA' by Standard & Poor's
- But if there is any hint of a downturn in developed markets, or if China migrates toward a worse-than-expected outcome, the resilience of the Australian economy over the next three to five years will be extremely challenged.
On the Reserve Bank of Australia:
- Rising household debt and property prices in major Australian cities have created a high hurdle for the RBA to move the policy rate from its current record low of 1.5%
- Sydney now the second-most unaffordable housing market in the world ... the RBA would not want to be blamed for inflating housing bubbles with a rate cut
- On the flip side, the relatively tepid state of the domestic economy should ensure that any RBA rate hikes are delayed at least until well into 2018
- If the Federal Reserve continues on its path of raising interest rates in the U.S. as expected, then for the first time in more than 15 years we may see the U.S. fed funds rate and the RBA policy rate reach the same level. As we move into 2018, there is a strong likelihood that the RBA cash rate will actually be below the fed funds rate.
