The markets are too hawkish

We believe that the financial markets are wrong to price in the possibility that the Reserve Bank of Australia (RBA) will raise interest rates twice next year. Admittedly, it is possible that after leaving rates at the current record low of 1.5% at the policy meeting scheduled for Tuesday 3rd October, the RBA may indicate that it is becoming more optimistic on the outlook for GDP growth and inflation. However, we believe that growth and inflation will fall short of the RBA’s expectations next year, forcing it to leave interest rates at 1.5% throughout 2018.