Growth prospects in Australian economy to lose significant momentum in 2016?

Over the last week or so market pricing for a full 25bp reduction in RBA's cash rate by December reached almost 100%. Despite the Bank adopting an easing bias it was not considered likely that the cash rate will be reduced at the December Board meeting. 

The data flow over the next few weeks will be concentrated on economic activity rather than any further news on inflation. It seems unlikely that, given the Bank's somewhat more constructive view on the growth outlook such data would trigger a rate cut by December. 

Of most interest will be the impact on confidence from the increase in mortgage rates by the banks and that will be known with the release of the Westpac Consumer Sentiment survey on November 11.

Other important data events will be the employment report; the quarterly wage price index; housing-related activity and prices; and the capital expenditure survey. The all-important GDP report for the September quarter will not be available until after the December meeting. 

Furthermore, the December Board meeting will be held only two weeks before the next meeting of the Federal Reserve where a Fed rate hike can be realistically expected. Markets continue to price 100% probability of a rate cut by February. 

That is a much more realistic assessment given more time will be available to assess growth momentum and most importantly the December quarter inflation report. It is and, apparently, the view of the RBA that the next report will see core inflation move back to the normal "trend" number of around 0.6%. 

"In that event this assessment of the likely growth momentum in the economy will point to rates remaining on hold in February and thereafter. Any change in that view will be largely driven by an assessment that growth prospects in the economy are likely to lose significant momentum through 2016", says Westpac.