The Reserve Bank is getting close to lifting its 1.5 per cent cash rate, the OECD believes.
In commentary accompanying its global economic outlook released in Paris on Tuesday night the organisation says stronger terms of trade and continued growth in resource exports are boosting n incomes and tax revenues.
Mining investment looks to have bottomed out, while rising capacity utilisation and high business confidence point to “a renewed cycle in business investment outside the resource sector”.
The recovery in employment growth and a rising number of vacancies indicate a strengthening labour market. However, underemployment has edged higher and wage growth and inflation remain steady. Rising household indebtedness and signs of a cooling housing market are keeping consumer sentiment “relatively soft”. Household spending remains subdued.
The OECD expects the Reserve Bank to push up its cash rate in the second half of 2018, “when the pickup in wages and prices becomes more entrenched”.
ASX futures pricing is less bullish, implying an unchanged cash rate for all of 2018.
The Organisation for Economic Cooperation and Development says the higher rate “will ease pressures on house prices and will reduce the threat of the build-up of other financial distortions,” something it says has already started to happen as regulators have taken steps to limit investor loans and loans with high loan-to-valuation ratios.
Its forecasts stick closely to those in the May budget.
Economic growth will climb from 2.5 to 2.7 per cent by 2019, inflation will climb to 2.2 per cent, the unemployment rate will remain little changed at 5.3 per cent.
In a sign of reluctance to embrace unfunded tax cuts, the OECD says the present budget settings are “appropriate” given projected growth.
Only if the economy grows more weakly than expected should the government use the improving budget position to delay the projected return to surplus or go deeper into deficit.
“Developments in commodity markets, particularly those linked to China, remain a source of uncertainty and risk,” the commentary says. “High house prices and rising household debt, amid subdued income growth, pose macro-economic and financial risks, calling for continued use of macro-prudential tools.
“Large corrections in house prices could reduce household wealth and consumption, and damage the construction sector, leading to job losses. In addition, some highly indebted households could face financial stress when interest rates rise.”
Peter Martin is economics editor of The Age.
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