Developer <a href="https://www.apartments.com.au/developers/bottega-property-group">Bottega House</a> has secured council approval for its first Brisbane project - a $270 million luxury residential development on an absolute riverfront site in leafy St Lucia.&nbsp;

The 15-storey project, known as <a href="https://www.apartments.com.au/new-apartments/st-lucia-by-bottega-house-180-macquarie-street-st-lucia-qld-4067">St Lucia by Bottega House</a> , will occupy a prime north-facing site at 178-180 Macquarie Street, directly fronting the Brisbane River in the established inner-west suburb known for its rowing clubs, golf courses and sprawling University of Queensland campus.&nbsp;

St Lucia by Bottega House will feature a suite of amenities including dedicated wellness spaces, a mineral pool and cold plunge. The project has been positioned to attract affluent owner-occupiers seeking high-quality, house-sized apartments.&nbsp;

Bottega House has been set up by co-directors Nick Malloch, Louis Mennes and Craig Marsh.

Malloch said the project drew inspiration from its Brisbane River setting and leafy inner-west surrounds, while responding to the demands of discerning locals looking to transition from freestanding homes into apartment living.&nbsp;

"With an expansive river frontage and lush green surrounds, we knew we had to create something special that reflects the natural beauty of the location while offering residents masterfully crafted homes," said Malloch.&nbsp;

"Our intent was to complement the project's quiet, private setting by introducing residences that offer a calm retreat and sanctuary from the everyday. The result is a harmonious blend of architecture, interiors and amenity that emphasises wellbeing, comfort and beauty without excess."&nbsp;

Malloch added that project consultants had been carefully selected in alignment with Bottega House's commitment to care, quality and attention to detail. The design team includes architects <a href="https://www.apartments.com.au/architects/plus-studio">Plus Studio</a>, interiors practice <a href="https://www.apartments.com.au/interior-designers/mim-design">Mim Design</a> and landscaping by <a href="https://www.apartments.com.au/architects/urbis">Urbis</a>.&nbsp;

Three-bedroom apartments are expected to start around $5 millio. Selling agents Keenan &amp; Byrne said the pricing strategy for the project was anticipated to achieve upwards of $25,500 per square metre.&nbsp;

The project's development approval this week follows the success of Bottega House's inaugural Queensland project - a 22-storey collection of full-floor sky homes at Broadbeach on the Gold Coast which included the sale of a two-storey penthouse at a record price for a beachside residence.&nbsp;

St Lucia by Bottega House is expected to launch to market in November, with construction anticipated to be completed mid 2029.

[smartcode_project_cta:default project_id=151826]

Joel Robinson

Bottega House to make Brisbane debut with St Lucia riverfront apartment development

<a href="https://www.apartments.com.au/developers/sherpa-property-group">Sherpa Property Group</a> is advancing its affordable apartment model into Brisbane with the acquisition of another site at Cordelia Street in South Brisbane for $27 million.

Sherpa, which has a $1.7 billion pipeline across Southeast Queensland, intends to bring a cohort of apartments exclusively for first homebuyers into its proposed 186-apartment project to be built at 2 Cordelia Street.

The Sherpa model has already been incredibly well received from their Gold Coast projects, where Sherpa Group set aside a number of apartments exclusively for first homebuyers.

The new $320 million project marks Sherpa Group's second development in Brisbane, following its $255 million Symphony project, also on Cordelia Street, which is currently under construction.

Symphony will deliver 146 apartments across 28 levels, offering a mix of one, two and three-bedroom apartments. With 114 already sold, construction by <a href="https://www.apartments.com.au/builders/lps-group">LPS Group</a> is scheduled for completion in 2028.

[smartcode_project:default project_id=7574 project_image_fid=351654]

Sherpa Founder, Christie Leet, said the company was excited to be venturing into Brisbane for its second residential project.

“We’re big believers in the future of Brisbane as we lead into the 2032 Olympics and beyond,” Leet said.

“The success of Symphony has guided us into what will be our second project and we look forward to submitting our plans with council soon so we can deliver yet another quality project to the inner city residential market.

“Our Flourish model has been very well received both in Brisbane and the Gold Coast, and we’re excited to be able to offer some of these apartments again exclusively to first homebuyers to help get them into the property market.

“The model has been extraordinarily well received in our previous projects and it is something we are committed to moving forward.”

2 Cordelia Street will be designed by <a href="https://www.apartments.com.au/architects/hal-architects">HAL Architects</a> &amp; Finegrain and will include Sherpa’s signature residential amenities including pool, gym, recreation, wellness and work from home spaces.

The project will feature ground-floor commercial space, creating a vibrant amenity for residents and the surrounding community.

A development application will be lodged with Brisbane City Council in August on the code compliant site and will be launched to the market early 2027.

Sherpa acquires new site for second Brisbane apartment tower

One of North Sydney's best-known commercial buildings could become hundreds of new homes, with insurance giant Zurich Australia lodging a State Significant Development Application (SSDA) to transform 5 Blue Street into a mixed-use residential development above North Sydney Station.

Rather than demolishing the existing building and starting again, Zurich is proposing an adaptive reuse project that would convert the landmark office building into a 15-level residential development delivering 62 apartments, 86 affordable co-living dwellings, activated retail and significant upgrades to the Blue Street Plaza.

The proposal reflects a growing trend of commercial property owners repositioning ageing office assets into residential housing as Sydney grapples with housing supply shortages and changing workplace demand.

<img alt="Zurich" data-entity-type="file" data-entity-uuid="0bba7d12-06dc-4375-aad7-238c94b21ac5" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%2010.42.05%E2%80%AFAM.png?VersionId=NJl5oLAEBDGuPmY3RnyliKODjMc8lvRh" />

Located directly above North Sydney Metro and train station, the 3,051 sqm site occupies one of the most strategically positioned parcels of land on Sydney's Lower North Shore.

Designed by fjcstudio, the proposal seeks to retain and adapt much of the existing structure while creating a contemporary residential address that better connects with the public domain surrounding North Sydney Station.

The application proposes two basement levels, ground floor retail, affordable co-living accommodation across the podium levels, and apartments above, while preserving and enhancing the publicly accessible Blue Street Plaza.

Rather than pursuing maximum apartment numbers, Zurich has opted for a housing mix heavily weighted towards larger owner-occupier residences.

The proposal includes 62 build-to-sell apartments comprising 12 one-bedroom, 19 two-bedroom, 29 three-bedroom apartments and two premium penthouses. It also incorporates 86 affordable co-living dwellings, which would be managed in perpetuity by a Community Housing Provider.

That balance between traditional apartments and affordable housing reflects the NSW Government's push to increase housing diversity around major transport infrastructure.

The proposal has been lodged concurrently with a rezoning application, with Zurich arguing the site is ideally positioned to support additional housing given its immediate proximity to public transport, employment and services.

"The proposal aims to respond to the housing challenges facing Sydney through the delivery of diverse housing types in a highly accessible location," the design report by fjcstudio states. It also seeks to improve pedestrian amenity through upgrades to Blue Street Plaza while creating a high-performing residential building that responds to the surrounding context.

<img alt="Zurich" data-entity-type="file" data-entity-uuid="36082e15-c636-4481-bb68-5a5f6443fe39" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%2010.41.36%E2%80%AFAM.png?VersionId=5P6VD.fvmqjQfIG3TWWMRXxQWiQBjeFB" />

Rather than replacing the commercial building, fjcstudio has developed a design that works with the existing structural framework above the rail corridor, an approach that significantly reduces demolition while allowing the site to be repositioned as a mixed-use residential precinct.

The existing structural constraints have informed much of the building's design, including its relationship with Blue Street and surrounding public spaces.

The building has been designed as a slender tower rising above a clearly defined podium, with vertically expressed façades intended to reduce the perceived bulk while reinforcing North Sydney's emerging skyline.

According to fjcstudio, the architectural language responds directly to the surrounding commercial towers while maintaining a finer grain expression more closely aligned with the neighbouring Lavender Bay streetscape.

The tower incorporates articulated façade elements, landscaped podium edges and recessed upper levels to soften its appearance and improve pedestrian amenity below.

A significant component of the proposal is the revitalisation of Blue Street Plaza.

The existing public space has long served as one of the primary pedestrian connections between North Sydney Station, Greenwood Plaza and Blue Street, yet its role is expected to become even more important following the opening of Sydney Metro.

Zurich's proposal seeks to strengthen that role by improving landscaping, introducing new retail frontages, enhancing pedestrian permeability and creating more active edges throughout the day and evening.

Ground floor retail would wrap the plaza, while separate residential and co-living entries have been designed to improve wayfinding without reducing street activation.

Landscape design has been integrated throughout the podium and public realm, softening what is currently one of the most heavily urbanised parts of North Sydney.

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fjcstudio has carefully oriented apartments towards Sydney Harbour and the CBD while using privacy blades and articulated façades to minimise overlooking between neighbouring buildings.

Large framed openings along the western elevation maximise harbour outlooks, while the eastern apartments have been angled towards the south-east to improve privacy from neighbouring development.

The project forms part of the continuing transformation of North Sydney from a predominantly commercial CBD into a genuine mixed-use city centre.

Since the completion of Victoria Cross Metro Station, developers have increasingly shifted their attention towards residential projects capable of leveraging the area's unparalleled transport connectivity.

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FiveX recently lodged plans for a 61-storey, 490-apartment tower that would become one of the tallest residential buildings in North Sydney if approved.

Aqualand continues to expand its Lower North Shore presence following the completion of AURA on Walker Street and its recent St Leonards and Roseville proposals.

Developers are also progressing projects throughout Walker Street, Miller Street and the Victoria Cross precinct as demand for well-located owner-occupier apartments continues to strengthen.

First look: Zurich targets North Sydney office conversion with 148-unit proposal above Metro station

Busy developer Aqualand Prestige has formally taken the next step in its expansion across Sydney's Lower North Shore, lodging a State Significant Development Application (SSDA) for its long-held Archer Street site in Chatswood.

The application covers <a href="https://www.apartments.com.au/new-apartments/51-55-archer-street-chatswood-nsw-2067">51-55 Archer Street</a>, a 1,767 sqm amalgamated site on the eastern edge of the Chatswood CBD, where the developer is seeking approval for a 45-level mixed-use tower delivering 114 apartments, including a significant affordable housing component, alongside retail, commercial space and six basement levels of parking.

The SSDA marks the latest milestone for a project Aqualand has been quietly progressing over the past two years. The developer first secured the site for its Aqualand Prestige platform before undertaking an alternative design excellence process with PTW Architects, ultimately avoiding a formal design competition through the Housing Delivery Authority pathway.

The proposal has evolved considerably from Aqualand's original concept. The revised scheme has been designed around larger owner-occupier product, with an unusually high proportion of three and four-bedroom apartments, targeting the more affluent buyer profile, and downsizer, emerging across the North Shore.

<img alt="Archer St" data-entity-type="file" data-entity-uuid="0171204c-5811-41b5-9b09-2335d1b7c3d0" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%208.52.48%E2%80%AFAM.png?VersionId=6YTuxfq.puZo7k2wbfgemcO5K3QfXYGQ" />

The 114-apartment mix comprises six studios, 27 one-bedroom apartments, 18 two-bedroom apartments, 50 three-bedroom residences and 13 four-bedroom homes. A quarter of the building will be dedicated to affordable housing, well above the mandated 15 per cent&nbsp;

PTW has structured the building vertically, with affordable housing across levels one to six, premium apartments through levels seven to 31, duplex skyhomes on klevels 32 to 43, a penthouse on level 44, and a rooftop plant level above. Six basement levels will provide resident parking and servicing.

The tower is proposed to reach approximately 154 metres, placing it among a growing collection of residential high-rises transforming Chatswood's skyline.

Rather than competing purely on height, PTW says the design has been driven by creating a slimmer tower capable of delivering significantly larger apartments.

"The primary objective of this project was to create a distinctive building that stands out from the recently approved or built structures in the Chatswood area," the design report states, noting the structural efficiency allows greater investment into apartment quality and resident amenity.

Residents would have access to more than 450 sqm of communal open space including landscaped gardens, swimming pool, rooftop entertaining areas, fitness spaces, community gardens, children's play areas and barbecue facilities.

A major focus of the design has been the public domain.

The ground plane has been opened up through landscaped terraces inspired by Willoughby's sandstone ridges, with native planting, public seating, artwork, retail activation and a series of gathering spaces intended to soften what has traditionally been a hard commercial streetscape.

The landscape strategy references Blue Gum forests once common throughout the area, while incorporating Indigenous storytelling, public art and lighting installations to strengthen the connection to Country.

Chatswood has been one of Sydney's busiest apartment markets over the past 12 months, with a steady pipeline of both new project launches and fresh development applications.

Hyecorp recently launched Celine, a 122-apartment development just along Archer Street, while Changfa and Huirong Group are progressing The Anderson, an 84-apartment project on Anderson Street.

Develotek recently secured approval for a 101-apartment tower on Pacific Highway, while Tian An LFD received the green light for Hammond Greens, its apartment development on the edge of the Chatswood Bowling Club.

Commercial property developer FiveX is also making its move into the residential market. Last month it lodged plans for a 61-storey tower with 490 apartments, which, if approved, would become one of the tallest residential buildings in Chatswood.

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/first-look-fivex-targets-chatswood-skyline-with-61-storey-tower-after-north-sydney-plans">First look: FiveX targets Chatswood skyline with 61-storey tower after North Sydney plans</a>

Aqualand is also expanding its development pipeline following the launch of its luxury residential brand, Aqualand Prestige. The developer has delivered a string of high-end apartment projects across Sydney's affluent suburbs over the past decade, most recently AURA by Aqualand on Walker Street in North Sydney.

[smartcode_project:default project_id=30959 project_image_fid=292863]

It has since quietly assembled its next wave of projects.

Earlier this year Aqualand launched Boronia in Roseville, a boutique 111-apartment development on Larkin Street. The project is one of the first significant apartment developments to launch in the suburb ahead of what is expected to become one of Sydney's most active new housing precincts under the NSW Government's Low and Mid-Rise Housing reforms, which allow greater density around train stations.

[smartcode_project:default project_id=152095 project_image_fid=373685]

The developer has also lodged plans for a two-tower, 413-apartment development on Herbert Street in nearby St Leonards, further strengthening its presence across the Lower North Shore.

Beyond that, Aqualand remains behind the final stage of Barangaroo, where plans will deliver a five-hectare mixed-use precinct comprising new homes, retail, hospitality and community facilities, alongside a new Metro entrance and more than two hectares of public open space, completing the Barangaroo precinct.

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/central-barangaroo-development-takes-big-step-with-concept-proposal-approval">Central Barangaroo development takes big step with concept proposal approval</a>

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/first-look-aqualand-joins-st-leonards-apartment-party">First look: Aqualand joins St Leonards apartment party</a> 
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First look: Aqualand pushes ahead with Chatswood apartment tower as SSDA lodged for Archer Street

Mass timber is becoming an increasingly popular construction material in apartment developments, but Adelaide developer <a href="https://www.apartments.com.au/developers/otello">Otello</a> is taking the approach a step further.

At its new <a href="https://www.apartments.com.au/new-apartments/flowe-bowden-18-gibson-street-bowden-sa-5007">Flowe Bowden</a> development, the exposed cross-laminated timber (CLT) structure isn't just about reducing the building's environmental footprint. It also forms the foundation of a broader wellness strategy, influencing everything from indoor air quality and natural materials to the way residents move through and experience the building.

The 115-apartment mixed-use development, designed by Melbourne-based architecture practice Fieldwork, will occupy a prominent island site opposite Bowden Village Reserve, combining one, two and three-bedroom apartments with retail and a dedicated wellness destination.

[smartcode_project:default project_id=152022 project_image_fid=375528]

Wellness isn't confined to a gym or shared resident facility at Flowe. Instead, Fieldwork embedded the concept into the building itself.

The development has been split into two residential wings connected by a naturally ventilated central breezeway, replacing traditional enclosed corridors with open-air walkways that improve natural light, encourage cross ventilation and create more opportunities for neighbourly interaction.

"Rather than treating wellness as something that only happens on the ground floor, our response integrates it throughout the building, which led us to ask what it really means to design a healthy building," Fieldwork Director Quino Holland said.

[smartcode_project:default project_id=152022 project_image_fid=375531]

The building's architecture also reflects Bowden's industrial heritage. The lower podium references the area's historic brick and sandstone buildings, while the upper levels transition to exposed CLT, allowing the timber structure to become a defining feature throughout the apartments and shared spaces.

The use of mass timber sits alongside a range of sustainability initiatives, including a fully electric, gas-free design, rooftop solar and a targeted 5 Star Green Star rating.

[smartcode_project:default project_id=152022 project_image_fid=375524]

Inside the residences, the focus remains on natural, durable materials. Blackbutt engineered timber flooring, exposed CLT ceilings, porcelain surfaces and warm timber joinery create a calming interior palette, while low-VOC finishes and responsibly sourced materials have been selected to improve indoor air quality.

Kitchens have been designed as the centrepiece of each apartment, featuring porcelain island benchtops, timber-look cabinetry and brushed steel tapware, with layouts that maximise natural light and ventilation.

[smartcode_project:default project_id=152022 project_image_fid=375530]

The more traditional interpretation of wellness comes in the form of Level Eleven, a two-storey wellness club spanning the ground floor, mezzanine and first floor.

The facility will include a gym, yoga and reformer Pilates studios, Finnish and infrared saunas, magnesium hot and cold plunge pools, and dedicated recovery spaces. Unlike many residential wellness facilities, Level Eleven will also operate commercially, allowing the broader Bowden community to access the venue while giving residents exclusive membership benefits.

The ground floor has also been designed around everyday living. A café overlooking Bowden Village Reserve will activate the street frontage, while a bike workshop with tool storage, co-working space and dog wash has been incorporated to support daily routines and encourage interaction between residents.

"Flowe brings together my two biggest passions, creating places and creating healthier lives," Otello founder Daniel Harris said.

"We wanted to create something Adelaide hasn't seen before, a genuinely healthy building, where the way you live is lifted without even trying."

Flowe is positioned directly opposite Bowden Village Reserve and within walking distance of Bowden Railway Station and the Adelaide Entertainment Centre, placing future residents just minutes from the Adelaide CBD while remaining connected to one of the city's most established urban renewal precincts.

[smartcode_project_cta:default project_id=152022]

Otello launches wellness-focused Flowe Bowden with Adelaide-first mass timber apartment design

Bill Evans

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EXPERT OBSERVER
The Reserve Bank Board decided to leave the cash rate at 1.50%.
The cash rate has now been on hold since August 2016.
Of course, we were not expecting any change today, but are always interested in the Governor’s Statement.
There were two issues that we thought might change in this Statement, particularly if the Governor had decided to be more upbeat in his commentary.
The first one was whether he would continue to describe the outlook for household consumption as “a continuing source of uncertainty”. This description was used in the September Statement but was dropped from the Minutes of that meeting. However, the comment has been repeated in today’s Statement. Secondly, we remain perplexed as to why the Bank can be optimistic about a lift in wages growth when it is only forecasting that the unemployment rate will fall from the current 5.3% to 5.0% by mid-2020. It was possible that, particularly following the upbeat employment report for August, the Governor may choose to indicate a lower target for the unemployment rate than the 5.0% that has been used in recent Statements. This was not the case and the 5.0% forecast has been retained. Of course, it remains a possibility that this forecast will be lowered in November with the release of the next Statement on Monetary Policy.
In terms of the actual changes in the Statement, we find two areas of interest.
Firstly, the inflation forecast for 2018 has been qualified. In September, a specific 1 ¾ per cent was nominated, whereas in today’s Statement, it is described as “one-off declines in some administered prices in the September quarter are expected to result in inflation in 2018 being a little lower than otherwise”. That probably refers to the recent lift in petrol prices which will affect the December quarter, adding upside risk to the forecast for headline inflation. No doubt, higher oil prices have been considered given the commentary around global inflation.
The second area where we have seen change has been around interest rates and credit. In September, following the out-of-cycle rate rise by one major bank, the Statement noted that the average mortgage rate paid is lower than a year ago. That strong comment is no longer used and it is merely pointed out that while lenders have increased their standard variable mortgage rates by small amounts, they have been reducing mortgage rates for some new loans.
Commentary around credit growth has changed. Whereas in September, housing credit growth was noted as declining, in this Statement, the Governor prefers to point out that “growth in credit extended to owner-occupiers remains robust”. Whilst at an annual rate of 7.4%, this is certainly true, the profile is slowing when we consider that the value of new lending to owner-occupiers (ex re-financing) is now down 5% for the year. Certainly, the new lending statistics support the second point “demand by investors has slowed noticeably”, with our estimate of the value of new lending to investors being a 27% fall (ex re-financing) for the year.
Secondly, in September, the Governor referred to “lending standards are also tighter than they were a few years ago”. This has been replaced with “credit conditions are tighter than they have been for some time”. Arguably, that is a stronger assessment of current credit conditions.
Conclusion
The final paragraph in the Governor’s Statement is identical to the Statement in September, emphasising that progress in reducing unemployment and returning inflation to the target is likely to be gradual.
While markets appear to be pricing in around a 40% probability of a rate hike by end 2019, we remain comfortable with our forecast that rates will remain on hold through 2019 and 2020.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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bevans-rYk9SxEa4r

No surprises in RBA Governor statement: Westpac's Bill Evans

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EXPERT OBSERVER
As expected, the Board of the Reserve Bank decided to leave the cash rate unchanged at 1.50%. There were very few changes in the Governor’s statement from the statement on August 7.
The Governor confirmed the central growth forecast for GDP growth to average “a bit above 3 per cent” in 2018 and 2019. Positive business conditions were noted but once again, “one continuing source of uncertainty is the outlook for household consumption”.
The rhetoric around the labour market was a little more upbeat. The unemployment rate at 5.3% was described as “the lowest level in almost six years”. Reports of skill shortages were noted and while wages growth was described as quite low, “it has picked up a little recently”. However despite that more positive assessment, the forecast for the unemployment rate remains unchanged to settle at 5 per cent “over the next couple of years”.
Since the last Board meeting, the Australian dollar had fallen from around USD 74.40 to USD 71.90. Furthermore, the Trade Weighted Index (TWI) had fallen from 63.5 to 61.8 (down 2.6%). This unusually large move prompted extra commentary on the AUD. It is still described as remaining within the two year range, but “it has depreciated against the USD along with most other currencies”. The move against the USD is around 3.3% compared to 2.6% for the TWI. It is a little surprising that the commentary seems to attribute all the weakness in the AUD to USD strength.
Since the August Board meeting, Westpac has increased its standard variable mortgage rate by fourteen basis points. It is interesting that the Governor continues to describe rates as “some lenders have increased mortgage rates by small amounts”.
The commentary around the housing market is unchanged with Sydney and Melbourne markets continuing to ease and housing credit growth declining to an annual rate of 5 ½ per cent.
The closing paragraph in the Governor’s statement is unchanged with the key commentary “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
Conclusion
Since the last Board meeting, Westpac extended its public forecasts to 2020. We expect the RBA to keep the cash rate on hold over the extended period. It is our view that the global economy, where growth appears to have peaked in 2017, will be slowing through 2020, particularly as the US economy slows under the weight of  further rate increases from the Federal Reserve and a curtailment of the fiscal stimulus..
The normal RBA policy of raising the cash rate at a time of strong global growth has been replaced in this cycle with other ways to tighten financial conditions. These have included macroprudential policies around banks’ mortgage books, and the rise in wholesale funding costs which has impacted the borrowing costs of banks, corporates, and in some cases, households.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
 
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Reserve Bank Board a little more upbeat on the labour market: Bill Evans

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To date Westpac has issued public forecasts for the outlook for growth and financial markets to March 2020.
These forecasts are incorporated in the August Market Outlook publication.
We are now extending those forecasts to end 2020.
Last year around this time we surprised markets by forecasting no change in the RBA cash rate out to end 2019. At the time markets were priced for at least three rate hikes (25 basis points per move) and the overwhelming majority of forecasters were anticipating the rate hike cycle to begin in 2018.
Markets have now partly moved into line with our view with only around a 50% probability of one rate hike by the end of 2019. Furthermore, 65% of forecasters in the Bloomberg survey are still expecting the cycle to begin by the third quarter of 2019.
Our view is that the cash rate is likely to remain on hold not only through 2018 and 2019 but also 2020.
Some may argue that we are unrealistically forecasting that Australia will completely miss the global rate hike cycle if rates remain on hold for such an extended period.
We differ from that view arguing that financial conditions are affected by more forces than just the RBA cash rate.
Through 2017 and 2018 we are already observing tightening conditions in the absence of RBA rate hikes.
This tightening is emanating from heightened macroprudential policies from the banking regulator APRA and the rise in wholesale funding costs for banks and corporates.
New lending to housing investors has fallen by 25% over the last year; housing credit growth is likely to slow from 6.5% in the year to September 2017 to 4% in 2018/19 and 2019/20. The bank bill rate has “settled” at around 25 basis points above those levels, which prevailed in previous years and is priced in markets to remain there for at least the next year or so.
As a direct reflection of that tightening in financial conditions we are now seeing housing markets weakening with outright price falls in both Sydney and Melbourne. These price corrections look set to be sustained for at least the remainder of 2018 and 2019 with soggy markets likely prevailing through 2020.
Housing markets typically recover when there is an increase in new buyers in the market. That increase can be attributed to a boost in affordability or a rise in confidence. In previous cycles affordability has been boosted by multiple rate cuts from the Reserve Bank; lower prices; and rising incomes.
In this cycle the Reserve Bank has made it clear that short of a major global financial shock (most likely emanating from China) or a major collapse in the local housing market, it will resist cutting the cash rate.
Neither of those scenarios figure in our central case.
Furthermore, we do not envisage a marked lift in income growth over the forecast period. Accordingly the “responsibility” for the restoration of affordability in the two major housing markets will accrue to prices. So an extended period of price weakness is required before we return to levels of affordability that will attract new buyers and stabilise the markets.
Bill Evans is the Chief Economist for Westpac
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Westpac expects RBA cash rate to remain on hold until 2021: Bill Evans

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EXPERT OBSERVATION 
Last week the Reserve Bank surprised by lowering its inflation forecasts for 2018 (both underlying and headline).
Headline was lowered from 2.25% to 1.75% and underlying was lowered from 2% to 1.75%.
If correct, that means underlying inflation will have printed below the bottom of the 2-3% target range for three calendar years in a row. Headline inflation will have printed below the bottom of the 2-3% target for five calendar years in a row.
Economists and policy makers generally focus on underlying inflation when assessing the meaning of the “signal” from any inflation print. That is appropriate because the underlying measure “trims out” any large “one off” movements that might be misinterpreted.
However, when assessing inflation over the long term the headline measure is important since it should be a more reliable driver of inflationary expectations.
After all, expectations could be reasonably expected to be influenced by what has actually happened rather than a statistical interpretation of the data.
Inflationary expectations are critical from a theoretical perspective to delivering an inflation outcome. They impact workers’ wage demands and firms’ pricing decisions.
“Inflationary expectations” are like “the natural rate of unemployment” or “the neutral policy interest rate”. They are highly attractive concepts for economists. However they are notoriously difficult to measure.
Consider the “natural rate of unemployment”. For Australia that measure is generally accepted to be 5%. As such it is expected that any unemployment rate below 5% will be associated with rising wage pressures. However evidence from other countries indicates that in this period of accelerating technological development, which is often “job substituting”, natural rates are lower.
We expect that it is highly likely that the natural unemployment rate will also be lower in Australia. But we will not know for sure until we get there. Certainly the Federal Reserve had a view that the rate was around 4.75%. But as the rate fell through 4.75%, wage pressures were missing.
We are not sure what the position of the Reserve Bank is on this issue given that the unemployment forecasts envisage the unemployment rate holding above 5% until near the end of 2020 and yet wage pressures are expected to build through the forecast period.
Policy makers forecasts and market watchers try to measure inflationary expectations. The Reserve Bank uses a range of measures – market economists’ forecasts; unions’s forecasts; inflation swaps; and the 10 year inflation indexed bond. These measures have been gradually falling and are described by the Bank as “generally consistent with the inflation target”.
However, the inflation target has been fixed for twenty years yet the expectations which used to be well above the target are now around the target. One exception is the measure which is widely used by other central banks, including the FED, the 10 year inflation indexed bond. Implied inflation expectations have steadily fallen from 3% to 2% over the last 10 years - well below the 2.5% target.
This comfort that inflationary expectations appear to be settling around the inflation target is the key reason why the Bank resists the periodic calls to lower the target.
The Bank believes that the existence of the target is a dominant driver of inflationary expectations. Consequently, if the target were to be lowered, then expectations would fall and a more disinflationary environment would evolve. This puts considerable weight on the target as a driver of expectations.
But, as discussed, the Bank has been unable to even reach the bottom of the target zone for five calendar years. Furthermore, they have made it quite clear that the next move in rates is up. Reasonably, economic agents could conclude that, even after five years, there is no urgency to reach the target.
We are unable to find a definitive measure of inflationary expectations. However after five years of underperformance of headline inflation below 2%, economic agents would be excused if they expected such conditions to persist.
With the Bank not prepared to use its interest rate “weapon”, and other policies around credit supply actually constraining activity, there must be a risk that, at least from an expectations perspective, low inflation is embedded in the system for longer than the Bank and the market is currently expecting.
In fact, Governor Lowe has often responded to demands to lower the target by claiming that others favour a higher target in order to boost inflationary expectations.
A reasonable query on the purity of the target could be made around the need to monitor financial stability when setting policy. That approach was confirmed by the Governor’s comments in a panel discussion at the Sintra Conference in June.
“To try to get it back to 2.5% very quickly, it would be mainly through people borrowing more money, and having higher asset prices — I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations.”
Reasonably, we can conclude that after five years of missing the bottom of the target zone, a more aggressive pursuit of the inflation target has been constrained by the need to address Australia’s challenges around financial stability.
The Bank is currently forecasting that despite three years of above trend growth (3.25% in 2018; 3.25% in 2019; and 3% in 2020 against a trend growth rate of 2.75%) inflation (headline and underlying) will only have lifted to 2.25% by 2020.
Perhaps that looks cautious but with inflationary expectations potentially anchored at or below 2%, it might be a tough target to achieve unless the Bank was willing to signal that it was prepared to pursue its target more aggressively.
Bill Evans is the Chief Economist for Westpac.
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RBA's inflation expectations may be anchored despite official target: Bill Evans

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EXPERT OBSERVER 
Prospects for the Australian Economy; Markets; and Global Risks
As we contemplate the remainder of 2018 and 2019 there are a number of key themes that we believe will dominate economic and market developments. Our advice to customers throughout 2017 has been to expect Australia’s growth rate to likely be anchored below trend in both 2018 (2.7%) and slowing to 2.5% in 2019. That has contrasted with official forecasts (Reserve Bank and Treasury) which anticipate growth picking up to 3.25% in both 2018 and 2019.
We have recognised a solid ongoing boost to growth from non–residential construction; government investment (especially at the state level) and exports. However we are much more cautious than official forecasts on the consumer; residential construction and equipment investment.
Slowing household incomes
Signals from the December quarter national accounts are more encouraging for the official view. Household spending has been revised up from an expected 2.1% to 2.9% following the release of the December quarter national accounts. This picture of households has changed from “lacklustre” to “slightly below trend”. However this was associated with a weak savings rate of 2.7% despite a boost in nominal labour income growth to 4.8% for the year largely due to an extraordinary lift in hours worked of 3.5%. With hours worked increasing so rapidly, labour income growth should have been boosted further but was constrained by wages growth and a drift to lower paid jobs – non-farm compensation per employee remained flat in the December quarter to be up an insipid 1.8% for the year.
Labour productivity fell over the year with GDP per hours worked falling by 1% over the year and unit labour costs growth lifting to 2%. This adverse development in labour productivity is tempering the recent strong demand for labour we experienced in 2017. In the year to April the annualised employment growth rate has slowed to 1.3%. There will clearly be a slowdown in the 2017 break neck pace of growth in hours worked over the course of 2018 and into 2019. Weak wages growth and the drift to lower income jobs looks set to continue putting downward pressure on growth in labour incomes. With the savings rate now probably at its lows, another year of below trend consumer spending growth can be expected.
Business investment
New business investment lifted by 5.8% over the past year, a sharp turnaround from a 6.2% decline over 2016. Over the year, infrastructure work fell 1.2%; non-residential building advanced 12.3% and equipment investment spending increased by 8.4%.
Mining equipment investment lifted by 31% over the year, reflecting the final fit out of three major projects. It is more encouraging that non-mining equipment investment lifted by 6.2% over the year following a slowdown in 2016 partly associated with the uncertainty around the 2016 election. With another Federal Election due by May 2019 and even greater uncertainty associated with that election (conservative government was expected to win the 2016 election whereas the Labour opposition is ahead in the current opinion polls), we may start to see equipment investment run into some headwinds from that political uncertainty from the second half of 2018. A less upbeat outlook for consumer spending in 2018 and 2019 is also likely to discourage equipment investment.
Housing downturn
Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019. Oversupply and a marked slowdown in sales to foreigners are weighing on the outlook for residential building. House prices are now falling. On a six month annualised basis, prices are now falling in Sydney (–7.3%); Melbourne (–1.2%); Perth (–0.4%) and Brisbane (–0.1%).
The regulator’s macro prudential policies are restricting interest only loans and tighter guidelines for all new loans are slowing house prices and credit growth. In previous cycles the authorities have relied on raising interest rates to slow the highly cyclical housing market. This time, the same effect has been achieved by the regulator as banks have independently raised loan rates; foreign demand has slowed; and regulations have significantly squeezed the availability of credit. This process will continue for the foreseeable future and the supply of credit is expected to tighten markedly.
On the demand side the attractiveness of investment properties has diminished. Land taxes and lacklustre rental growth have tightened rental yields. Prospects of adverse tax changes in the event of a change of government are also impacting investor confidence. All major banks (with the exception of Westpac) are predicting rate increases out to end 2019. New lending to investors tumbled by 9% in April to be down 26% over the course of the last year.
The current fall in investor loans is comparable to the all in 2015/2016. That subsequently reversed in the aftermath of the May and August rate cuts – prospects for a repeat of rate cuts seem unlikely.
We expect an extended period of falling house prices (up to 10% over the course of the next two years) with weakness particularly centred on the Sydney and Melbourne markets. This will represent a considerable change in the “atmospherics” around housing wealth and may weigh further on prospects for consumer spending. While the wealth effect was modest in the period of rising house prices it is reasonable that there will be a more marked effect through the downswing.
Inflation below target
Inflation is also likely to remain benign holding a little below the bottom of the Reserve Bank’s 2–3% target band. In this regard we are in broad agreement with the Reserve Bank which is forecasting that underlying inflation will hold at around 2.0% in 2018 and 2019. Note that underlying inflation has held below the 2–3% target band in 2015; 2016 and 2017.
With underlying inflation likely to therefore register five consecutive years at or below the bottom of the target range it is reasonable to argue that Australia is experiencing a structural fall in inflation. Arguably, without the risk of overheating the housing market (as would have been a concern through 2016 and 2017), interest rates would have been even lower in Australia in recognition of this structural fall and the disappointing progress in restoring inflation to the target range.
Interest rate outlook
Throughout 2017 and 2018 we have been of the view that the official cash rate will remain on hold in both 2018 and 2019. With rates on hold in Australia and the US Federal Reserve continuing to raise rates, Australia’s cash rate has now fallen below the Federal funds rate. By end 2018, it is set to be 63 basis points below the Federal Funds Rate, and by end 2019, 112 basis points below the Federal Funds Rate.
Sustained period of negative Aus–US rate spreads
The US economy is operating with much less ‘slack’ in its labour market (unemployment rate of 3.9% compared to an estimated full employment rate of 4.5%) than Australia (unemployment rate of 5.6% compared to a full employment rate of 5.0%) but, to date, wage pressures have only recently emerged (six month annualised pace for the wages component of the ECI has lifted to 2.9%).
Of most concern to markets has been the planned lift in government spending ($300 billion over 18 months) and the Tax Cuts ($1.5 trillion over 10 years) in the US. These policies are likely to boost the Budget deficit by around 2% of GDP providing a solid boost to demand when the economy is already operating at full capacity in the labour market.
We expect two 25 basis point hikes in June and September from the FED. That would see the USD/AUD yield differential in the overnight market contract to minus 63 basis points – a situation we have not seen since early 2000. Two further FED hikes are expected in the first half of 2019.
AUD/USD Bond Spread
Back in July 2017 Westpac was forecasting that the RBA cash rate would end 2018 at 38 basis points below the FEDERAL FUNDS rate. Markets were priced for the RBA cash rate to be 35 basis points ABOVE the FEDERAL FUNDS rate. We expected that if our pricing proved to be right the 10 year bond spread would fall from 60 basis points to zero. Today markets are broadly in line with Westpac’s view with both expecting the RBA cash rate to be 60 basis points below the FEDERAL FUNDS rate by end 2018. However Westpac expects that marguin to increase to 112 basis points by mid-2019 whereas the market is pricing in a more cautious 80 basis points. The bond spread has already moved to minus 20 basis points and Westpac expects it to reach minus 40 basis points by mid- 2019.
Commodity Prices; China; and the Australian Dollar
Recent general euphoria around the global economic outlook has changed to caution. Uncertainty around trade; falling PMI’s in Europe; Japan and Korea and rising bond rates in the US all signal caution. Growth in the Chinese economy is expected to slow as consumption and net exports are unable to compensate for the ongoing slowdown in investment. However, the big uncertainties and risks centre around the Chinese financial system.
China realises that it must move away from its growth model based on credit fuelled exports and investment. In particular the role of the financial sector must change from channelling high savings at low cost to strategic sectors, to facilitating China’s economic transformation to a more sustainable model based on services and consumption. But the “old" model has resulted in financial assets growing from 260% of GDP in 2011 to 470% in 2016 (IMF, 2017). The excessive growth (around 30% per annum over the last 10 years) has been in the largely unregulated non–bank sector.
President Xi has nominated poverty; pollution and financial leverage as his key “challenges”. The “shadow banking sector” particularly funds property development and speculation; local governments (which explain 80% of infrastructure investment); and commodity speculators. All these users of funds expect excessive returns and can service higher loan payments . The sector is beginning to be squeezed.
We are already seeing some evidence of this squeeze on the non–bank sector. Banks are no longer allowed to guarantee wealth management products; entrusted loans (corporates borrowing to lend to other corporates with banks operating as agents) have been banned; rapid growth in short term interbank funding has been slowed; and general funding for wealth management products is being restricted. Growth in the non- bank sector is severely lagging the pace of 2017.
These forces are likely to weigh on iron ore and coking coal prices. Some lift in supply from Australian producers is also expected to lower prices. These atmospherics for commodity prices along with the widening interest rate differential; and more appetite for the USD in an uncertain world are eventually expected to weigh on the AUD. We target AUD at USD 0.74 by end 2018 and 0.70 by 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
 
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Expect Australia's growth to be below trend: Bill Evans 2018 and 2019 outlook

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EXPERT OBSERVATION
The minutes of the May monetary policy meeting of the Reserve Bank Board repeated the assertion that first appeared in the April minutes. That is that “members agreed that it was more likely that the next move in the cash rate would be up rather than down”. This observation is contingent on the economy evolving in the way the Bank currently expects which is “a gradual pick-up in inflation as spare capacity in the economy is absorbed and wages growth gradually picks up”. Nevertheless the Board observed that spare capacity in the labour market would remain for some time.
Using this terminology might create challenges for the Bank in the future. If the term is ever deleted from the minutes, markets are likely to take that as a sign that the Bank’s policy stance has changed.
Note the “bold” move from the new Governor of the RBNZ (Adrian Orr). He lowered his growth and inflation forecasts and stated, “the Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down”.
The Reserve Bank of Australia however did not lower its growth or inflation forecasts in its recent Statement on Monetary Policy but did make a subtle change in the rhetoric of the minutes, “it would be appropriate to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence”.
That implies a 'badge of honour' to have steady rates, rather than a stance that needs to be justified in a world where other central banks are tightening policy. Perhaps the lead from the RBNZ, who have recognised the risks around the current environment, has had some impact on their thinking.
The clear positive development for the economy has been the strong boost to non-mining business investment particularly non-residential construction and government public works. The Bank is justified in expecting that this strong momentum will be sustained although in our view at a decreasing pace. We expect that non-residential construction which added 0.6 percentage points to GDP growth in 2017 will gradually reduce its contribution to GDP growth to 0.33 percentage points in 2018 and 0.19 in 2019. Equally we also see government public works spending will also grow but at a slowing pace contributing 0.4 percentage points in 2017, 0.31 in 2018 and 0.23 in 2019.
There remains the concern that wage pressures may take some time to emerge. Indeed Deputy Governor Debelle highlighted a key risk to the Bank’s outlook in his speech on May 15. He nominated that risk as being that the level of the unemployment rate needed to spark wage and inflation pressures might be lower than the Bank’s current unemployment forecast. Note that this is a fairly cautious 5.25% (from current 5.6%) by June 2019 and remaining there through to the end of the forecast period by June 2020.
In fact this forecast represents a downgrade of the unemployment outlook. In the February Statement on Monetary Policy the forecast was for the unemployment rate to fall to 5.25% by June 2018 – a full year earlier than the current forecast. In that sense the Bank has actually downgraded an aspect of its growth outlook. This presumably reflects the slowdown in jobs growth we have seen in 2018 with the four month annualised pace slowing to 1.3% from overall growth in 2017 of 3.4%.
These cautious forecasts of the unemployment rate must indicate that the Bank is aware of the risk that the labour market does not tighten sufficiently to boost wages and other incomes. In fact general estimates of the so-called full employment rate (NAIRU) have been around 5% for Australia. In other countries, their traditional NAIRU estimates have been downgraded in the aftermath of the GFC.
Certainly there is still no sign of any lift in wage pressures. The March quarter wages report printed on May 16.
Total hourly wages ex bonuses rose by 0.5% in Q1 compared to a median of market expectations (and Westpac’s) of 0.6%. This is the second quarter of a disappointing wage print, Q4 WPI rose 0.6% compared to a median expectation of 0.7%. The Q4 print was also revised down to 0.5% from 0.6% as it was originally reported. These modest wage outcomes leave annual private sector wages growth “stuck” at 1.9% despite the 3.3% increase for the minimum wage as determined by the Fair Work Commission.
The Board discusses this prospect when it talks about the wage price index not picking up as quickly as in the past when business surveys identified some shortage of suitable labour. The Board discussion moved to international evidence which shows similar inertia in wages and they discussed possible reasons including competitive pressures from globalisation and technological change. We would add: low productivity growth; falling unionisation; high household debt which constrains job mobility and lack of pricing power generally in the economy. As one employer noted “Why should I grant a pay rise if I cannot compensate with a price rise"?
There may be some source of embarrassment in the minutes in that it is noted that “recent data on retail” suggested that momentum had continued in early 2018. Since the Board meeting, the retail sales report showed that real retail sales had grown by a very modest 0.2% in the March quarter.
This downbeat take on the consumer was further supported by the Westpac Melbourne Institute Index of Consumer Sentiment. The May Report showed a further modest deterioration.
This followed the well-received Commonwealth Budget which included personal tax cuts; savings largely explained by tighter scrutiny of the black economy (few specific losers) and an improved fiscal position. The modest 0.6% fall came as a surprise. It was underpinned by a 6.5% fall in the sub Index (household finances compared to a year ago) and although the Budget boosted confidence in the near term economic outlook, it failed to spark interest in respondents’ assessments of their finances.
In the minutes, there was a more detailed discussion on the outlook for housing. In particular, the Board notes that “a further tightening in lending standards in Australia, particularly in the context of the current high level of public scrutiny of Banks, was possible which would affect household borrowing and spending”. The recent release (since the Board meeting) of housing finance data showing that new lending to investors was now down 26% over the year (and 30% from the peak) is certainly consistent with those concerns.
That clearly signals a slowing in credit growth and the Deputy Governor, in his speech, acknowledges that likelihood. The issues are not only around reduced confidence amongst investors but an impact on the amount of funds an individual can borrow. Deputy Governor Debelle postulates that such a tightening has implications for house prices more than consumption. We do not think that argument is strong. For example note the significant impact on household finances in the Consumer Sentiment survey partly reflecting weaker housing – it is risky to assume little wealth effect when prices fall just because it seems to be muted when prices rise.
The Deputy Governor does address the issue of the implication for a fragile housing market if the RBA raises rates. He notes that an environment where rates are rising would “highly likely to be one where wages and household incomes are growing faster than currently, improving the ability of households to afford higher mortgage payments.” That is a reasonable argument and does demonstrate that the Bank is mindful of the impact of increasing rates on a fragile housing market.
Westpac continues to expect that the Bank’s policy of “stability and confidence” (rates on hold) will be maintained throughout 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA approach backed up by wages and confidence data: Westpac's Bill Evans

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EXPERT OBSERVATION
The Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.
We have been interested to follow the various descriptions of the Bank’s growth forecasts over the last few months.
These have ranged from “a bit above 3%”; “central forecast remains for faster growth in 2018”; “growth above trend”; and today, “Growth to pick-up to average a bit above 3% in 2018 and 2019”.
In our preview of the SoMP, we speculated that the forecast would be modestly shaved to 3% in 2018 and 3 ¼% in 2019.
That would still be consistent with an average slightly above 3% and seems more likely than the 3 ¼%, 3 ¼% which was in the February SoMP. 
In its MYEFO in December the government forecast growth of 3% in 2018/19 and 2019/20 compared to 3.25% for the RBA. In 2018/19 and 2019/20 .
The Bank may choose to “go half way” given it is unlikely the government will change its forecasts in the Budget on May 8.
The other interesting forecast in the May SoMP will be underlying inflation in 2018. In February, the forecast was 1.75%, below the 2-3% target band and following 1.6% in 2016 and 1.8% in 2017 – hardly a vote of confidence in the 2-3% target band.
Commentary in this statement is the same as we have consistently seen with the recent inflation report being described as “in line with the Bank’s expectation”.
That would tend to suggest that it will remain cautious around the inflation outlook and forecast 1.75% for 2018.
Given that the trimmed mean printed 0.5% for the March quarter, the implication is that the Bank does not expect any marked lift in the quarterly pace through 2018.
In the minutes to the April meeting, the Board noted that it was more likely that the next move in rates will be up rather than down.
That sentiment was not in the Governor’s statement in April and did not figure in this statement. In fact, the final paragraph in the May statement is exactly the same as the final paragraph in the April statement.
Commentary in previous statements around the labour market has been unreservedly upbeat. It was therefore interesting to note that the Governor recognised that employment “growth has slowed over recent months”.
Nevertheless, the Governor remains confident that solid employment growth will lead to a gradual reduction in the unemployment rate.
In April, the Governor referred to tightening financial conditions due to the rise in short-term USD interest rates and this observation has been repeated today.
Sentiment around household consumption “source of uncertainty”; housing markets “have slowed”; and the AUD (TWI) “remains within the range it has been in over the past two years”; is consistent with recent statements.
Assessments of the global environment are largely unchanged despite the increase in long-term US bond yields of around 25bps.
Conclusion
We will receive a much more detailed update on the Bank’s views in the Statement on Monetary Policy on Friday. Since the last Statement, housing markets have slowed further; financial conditions have tightened; employment growth has slowed; and equity markets have become more volatile.
All of these factors point to the Bank having even more scope to remain patient with respect to policy.
As we have consistently argued since mid- 2017, Westpac continues to expect that the cash rate will remain on hold in 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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No rate change in 2018 and 2019: Westpac's Bill Evans

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EXPERT OBSERVER
The minutes of the Reserve Bank’s Board meeting on April 3 contained a surprise in the final paragraph – “it was more likely that the next move in the cash rate would be up, rather than down”. 
We have seen the Governor make that statement in speeches but have not previously seen a formal confirmation from the Board. 
The timing is particularly pertinent given developments around financial conditions; the jobs market; and a looming Inflation Report. 
Think back to April 2016. Markets were relatively benign with one cut priced in over the next 12 months. Today markets are priced for one hike by mid-2019. 
Then we saw the March 2016 Inflation Report. Markets were expecting a rise of 0.5% in the underlying inflation measures while our analysis of the RBA’s forecasts suggests it was expecting 0.6%. 
In the event the underlying CPI measures printed an average of 0.175%. The Board had been forecasting 2.5% for annual underlying inflation for 2016. On the basis of that March Report the forecast was lowered to 1.5% and the Bank cut the cash rate by 0.25% in both May and August 2016. 
On April 24 there will be another Inflation Report, this time for the March quarter 2018. Westpac (and the market) is once again forecasting 0.5% for the average of the underlying measures. This time, however, the Bank is forecasting 1.75% for 2018 implying an average of around 0.45% for each quarter. 
What caused the big surprise in 2016? 
“House purchase” (the cost of building a home) rose by only 0.2% whereas we expect 0.7% (following 0.6% last quarter) for March 2018. 
Most of the demand related components were lower in 2016 than we expect in 2018. 
Clothing and footwear (–2.6% in 2016; –2.0% in 2018); household contents (–0.4%; –0.3%); communication (–1.5%; -0.9%); audio visual (–3.5%;-2.2%); holiday travel (–2.0%; –0.2%) are all expected to be less negative in 2018 than 2016 but nevertheless signalling deflationary forces. 
We also expect the large seasonal components pharmaceuticals (4.8% in 2016; 5.3% in 2018) and education (3.1% in 2016; 3.8% in 2018), to be higher in 2018.
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Finally there was a 10% fall in fuel prices in 2016 whereas they have been steady in 2018. This component would have been “trimmed out” of the 2016 numbers although there would have been some indirect effects through business costs that may have further biased down the 2016 numbers. 
So we can reasonably conclude that the housing weakness and strong deflationary effects we saw in 2016 are unlikely to be replicated in the same size in 2018 dismissing the prospects of a 2016 style shock. Nevertheless the themes remain the same – weakening housing and deflation in demand related components precluding us from entirely dismissing a repeat of the 2016 episode. 
Further, I don’t expect that Governor Lowe would respond to such a shock in the way we saw with Governor Stevens. True, both were or are observing a rapidly cooling housing market. 
In March 2016 Sydney house prices had fallen 4.2% (six month annualised) compared with an increase of 18% a year earlier. 
In Melbourne prices were up by 2.8% compared to 21% a year earlier. 
Today the numbers are Sydney (–5.4%; 21%) and Melbourne (2%; 16%). Note the second boom in house prices in both Sydney (21%) and Melbourne (16%) followed the 2016 rate cuts.
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Governor Lowe has the benefit of observing that the Stevens’ rate cuts achieved little in restoring inflation pressures (note we are still experiencing deflationary pressures in the demand related components of the CPI) while the cuts did reignite the housing market requiring another round of macroprudential policies. 
However Governor Lowe is now facing a significant tightening in financial conditions, partly emanating from offshore, that was not apparent for Governor Stevens. 
The Bank Bill Swap Rate which determines funding costs for most corporates and commercial borrowers has lifted by around 30 basis points - spreads against the risk free rate are now the widest since 2009. 
This rate also drives the wholesale funding costs of banks and non- banks. 
Various explanations have been put forward to explain this development. It appears to be the unfortunate coincidence of a number of factors which are impacting both the demand and supply of US money market instruments. On the supply side the US Treasury has sharply lifted its issuance of short term assets to fund the lifting of the debt ceiling and the fiscal stimulus.
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On the demand side we have seen the US Federal Reserve begin to shrink its balance sheet after years of quantitative easing while US corporates who had accumulated vast quantities of short term paper investments are now eschewing those investments in favour of very short term liquidity in anticipation of managements’ decisions on the use of this liquidity. 
This flexibility comes in response to tax changes announced in the recent overhaul of tax arrangements which has freed up these liquid investments. In addition, the BEAT tax has encouraged US branches of foreign banks to replace inter-office loans with direct wholesale funding.
These forces have boosted the LIBOR rate which has fed directly into the BBSW rate as Australian banks convert more expensive US funding to AUD or switch demand back to the domestic markets. 
While conditions for business borrowers have tightened, banks have not adjusted their standard variable mortgage rates therefore moderating the impact on the economy of these higher rates. 
However, banks must be experiencing some pressure. This would be despite the fact that banks have raised their retail deposit shares of funding from around 50% pre GFC to around 60%. 
At least one mortgage lender has raised its mortgage rates (another bank Suncorp raised rates by 5bps). Members Equity Bank has raised its owner occupier principal &amp; interest (P&amp;I) rates by 6 bps; Investor P&amp;I by 11 bps; and investor interest-only loans by 16 bps. This entity would not have the extensive access to retail deposits that we see for the banks and would therefore most likely be disproportionately affected by the increase in wholesale rates. ME Bank also attributed the rate hike to increased compliance costs associated with the regulator. 
These policy moves from the regulator can also be expected to tighten financial conditions over the medium term. The Reserve Bank’s Financial Stability Review notes that, according to their estimates, directions to move borrowers from interest only loans to principle and interest may have implications for households’ disposable incomes. 
Around 30% of the current stock of mortgage credit is expected to move from IO to P&amp;I over the next 4 years. The step up in mortgage payments when the IO period ends is estimated to be in the range of 30 to 40 per cent even after factoring in the typically lower interest rates charged on P&amp;I loans.
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This constant pressure on the household balance sheet can, arguably, lower the “neutral” interest rate over that period. Currently the Reserve Bank estimates it as a cash rate of 3.5%. 
Finally it would be remiss not to point out further confirmation of our view that the growth pace of the labour market would ease significantly in 2018. Recall that employment growth over 2017 has been around 3.4% while the momentum in the first three months of 2018 has slowed to 1.2%. We remain comfortable with an expectation of around 2% employment growth in 2018 – a pace likely to hold the unemployment steady around 5.5%. 
In conclusion we do not see the decision by the Board to speculate that rates have bottomed out as significant. The basic trends in inflation remain in place along the lines of what we saw in 2016. In such an environment there will always be a chance of a much lower Inflation Report on April 24 than we are expecting (recall 2016). However, until recently, the hurdle for lower rates has been much higher than 2016. 
In 2016, we did not experience this bout of tightening financial conditions either through rising funding costs or regulation. Combine that with a slowing housing and jobs markets and if anything, the Board’s declaration does look a little bold. 
Westpac remains very comfortable with its out of market call for the cash rate to remain on hold in 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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Benign inflation number will result in no cash rate jump: Bill Evans

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Expert Observer
As expected, the Minutes of the March Monetary Policy Meeting of the Reserve Bank Board provided no real surprises although from our perspective there is some confusion as to the Bank’s growth forecast for 2018.
When the Governor made his statement following the Meeting, he changed the growth assessment for 2018 from “a little above 3%” to “faster than 2017”. That appeared to be a substantial change given that the expectation was that growth in 2017 (to print the following day in the December quarter GDP report) was expected to be only 2.5%. In today’s Minutes, we get a third variation where growth in 2018 is described as “expected to exceed potential growth”.
Potential growth is assessed by the RBA as 2.75%. So, we can conclude that despite sending somewhat different signals, the Statement and the Minutes are both pointing to a somewhat lower growth outlook for 2018. Note that the forecast for the February Statement on Monetary Policy was 3.25% and we will receive the next forecast on May 4.
The discussion around consumption is little changed. There is still “uncertainty surrounding the outlook for consumption growth”. Note that this meeting did not have the advantage of knowing the substantial upward revision for consumption in 2017. Based on partials, it was reasonable to expect consumption growth in 2017 to be around 2.2%.
The final number printed 2.9%. In response to that faster momentum, Westpac has revised up its GDP forecast for 2018 form 2.5% to 2.7%. However, we still expect growth of 2.5% in 2019, indicating a slowdown in the economy in that year. Even with this faster actual consumption path in 2018, we still think the Bank will remain uncertain around the consumption outlook, particularly given the reference to the impact of high household debt levels on consumption.
There is a special consideration of the switch from interest-only to principal and interest loans, and the associated impact on borrowers’ cash flows. The Board notes that “the increase in payments would be significant for some individual households”, but concludes that this impact represents “a small proportion of household disposable income”. We concur with that assessment.
There is a long discussion on the outlook for business investment, concluding that there may be some upside risks to the Bank’s forecasts in growth in non-mining business investment over the medium term.
The discussion on the labour market continues to be dominated by the word “gradual”; “wages growth was expected to rise gradually and spare capacity in the labour would continue to decline gradually”.
Housing markets in Sydney and Melbourne are recognised to have slowed and housing credit growth had eased, particularly under the weight of tighter credit standards. However, the Board is not fully satisfied and still noted that household balance sheets continued to warrant “careful monitoring”.
It is noteworthy that the Minutes assess financial market pricing as indicating that the cash rate is expected to remain unchanged during 2018 with a 25bps increase expected in the first half of 2019.
Commentary around the Australian Dollar is unchanged “on a trade-weighted basis, the Australian Dollar remained within its range of the preceding two years”. Overall conditions in the global economy are assessed as continuing to improve with a broadly based upswing. Nevertheless, the minutes repeat the Bank’s long-held view that Australia’s terms of trade are likely to “decline over the following few years”.
Conclusion
Given that the national accounts were not available at the time of the Board meeting, it is not certain that the Bank has decided to lower its 2018 growth forecast from 3 ¼ per cent. Certainly, Westpac assessed the December quarter report as justifying a modest lift in our growth forecast from 2.5% to 2.7%. A growth forecast of 3 ¼% in an economy where potential is 2.75% would normally be associated with a central bank that expects to tighten policy at some stage over the course of the year. We certainly have believed that the Bank held such an expectation.
The ongoing emphasis on “gradual” with regard to the labour market and inflation increase the probability that the Bank is reassessing that view. It was always our expectation that such a reassessment would occur over the course of 2018.
We continue to expect that the cash rate will remain on hold in 2018 and 2019.
With growth slowing to below trend in 2019, we cannot see a case for higher rates in that year either.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Confusion on the RBA's growth forecast for 2018

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Guest Observer
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.
While we expected that result, we were not expecting any significant surprises in the Governor’s Statement.
We were wrong.
Readers will be aware that Westpac has been consistently critical of the RBA’s GDP growth forecasts for 2018 and 2019 of 3 ¼ per cent in both years.
We have consistently argued that the number will be more in line with 2.5%. In all recent statements, the Governor has noted “the Bank’s central forecast for the Australian economy is for GDP growth to pick up to average a bit over 3% over the next couple of years”. This is confirmed in the official forecasts from the February Statement on Monetary Policy of 3 ¼ per cent in 2018 and 2019.
In today’s statement, he notes “the Bank’s central forecast is for the Australian economy to grow faster in 2018 than it did in 2017”. Tomorrow, with the release of the December quarter national accounts,  the measure of GDP growth in 2017 will print. Consensus  expects  growth of 2.5%. Westpac expects 2.4%. On the reasonable assumption that the RBA has a similar estimate (forecast in February SoMP was 2.5%), the above statement can be interpreted as the Bank now feeling comfortable with growth being above 2.5%, which is a major qualification of the Bank’s previous growth outlook.
This change does not seem to be indicated by a change in rhetoric around the economy. Indeed, the Governor points out that growth in exports “is expected to recover from the temporary weakness at the end of 2017”. Arguably, we could interpret this observation as attributing the lift in growth in 2018 mainly to a pick-up in exports. While the Reserve Bank does not supply independent estimates of its forecasts for household consumption, we have always presumed that it is more optimistic for household spending in 2018 than in 2017.
Certainly, Treasury’s forecasts indicate an expected boost to consumer spending in 2018. The RBA continues to highlight the outlook for household consumption as a “continuing source of uncertainty”.
While this change in the attitude to growth appears to be somewhat more dovish, the Bank does show some more confidence about wages. The Governor points out that “the rate of wage growth appears to have troughed”. This is an upgrade from the wages commentary in previous statements. The facts are of course that annual wages growth lifted in the December quarter from 2.0% in the September quarter to 2.1%, also consistent with the Governor’s comment, “wage growth remains low”.
The commentary around housing has also changed somewhat. The two major markets, Sydney and Melbourne, are now singled out and described as “have slowed”.
There is no change in the commentary around inflation (“likely to remain low for some time”); the Australian dollar (“remains within the range it has been in over the past two years”); employment (“forward looking indicators continue to point to solid growth”); Terms of Trade (“expected to decline over the next few years”); and the global economy (“has strengthened over the past year”).
The recent volatility in the share market is recognised, although no implications for markets or the global economy are drawn.
Conclusion
The Reserve Bank appears to be less confident about the growth outlook. Nevertheless, we still believe that it expects to be raising interest rates beginning sometime in late 2018 and into 2019. That would be in line with current market pricing.
In contrast, Westpac is not surprised to see the Bank more cautious on the growth outlook and we continue to expect that the cash rate will remain on hold in 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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