Far from plain sailing: The RBA's policy update talked about some new risks building for Australia's economy

SYDNEY, AUSTRALIA – DECEMBER 26: LDV Comanche sailing out of Sydney yesterday for the 2017 Sydney to Hobart yacht race. (Photo by Brett Hemmings/Getty Images)
  • A notable tone of caution was evident in today’s quarterly Statement on Monetary Policy from the RBA.
  • Aside from a downgrade to near-term inflation, the RBA maintained its optimistic growth forecasts for the Australian economy.
  • However, RBC Capital Markets analyst Su-Lin Ong said today’s statement “contained far more factors highlighting downside risks than upside”.

The RBA largely stuck to the script in today’s Statement on Monetary Policy, maintaining its relatively upbeat assessment of the Australian economy.

Today’s SoMP included a timeline through to December 2020 for the first time. Both headline and core inflation are forecast to reach 2.25% by the end of that year — still below the mid-point of the bank’s 2-3% target band

So there’s no indication that rates are going anywhere anytime soon. The bank retains the view that any lift in wage growth, and by extension inflation, is likely to be gradual.

However, accompanying the latest projections was a 69-page statement detailing the RBA’s broader outlook.

And according to RBC Capital Markets strategist Su-Lin Ong, upon closer inspection the statement “contained far more factors highlighting downside risks than upside”.

“Some of these factors are not new, whilst others have emerged since the last statement,” Ong said.

Among the changes was a notable shift towards the risks of trade protectionism, given the significant escalations in US-China trade tensions since the last SoMP in May.

“While the outlook is largely unchanged from the May Statement on Monetary Policy, the downside risks to global growth from trade protectionism have increased,” the RBA said.

Ong noted the RBA also flagged concerns regarding the amount of excess capacity in the economy, and the outlook for domestic consumption.

That’s a more familiar theme among domestic analysts, given Australia’s household debt-to-income ratio has climbed to record-highs while wage growth remains at multi-year lows.

The drought

But in another new addition to the negative risk outlook, the RBA also flagged the ongoing challenges faced by Australian farmers.

“The persistence of drought conditions (in terms of rainfall deficiencies) in recent months in several states is likely to affect rural output adversely in the period ahead,” the RBA said.

There’s also China — Australia’s biggest trading partner — which in addition to facing a possible trade war, is also carrying out a domestic deleveraging campaign.

The RBA noted that China’s economy has slowed this year while Chinese stocks have lost ground. However, it took an optimistic view towards China’s property market, and highlighted recent measures by Chinese authorities to support growth.

In addition to moves by the People’s Bank of China to increase liquidity, authorities have also issued guidelines for targeted infrastructure investments and tax deductions for R&D projects.

Back on the domestic front, Ong noted the most glaring change from this morning’s update — a downgrade to near-term inflation which the RBA attributed to lower utility costs.

So while RBA governor Philip Lowe reiterated this week that the next move in interest rates is still likely to be up, an increased degree of caution was evident in today’s statement.

“We continue to think that the RBA’s GDP forecasts err a little on the optimistic side, largely reflecting our lower household consumption forecasts,” Ong said.

“More importantly, we also think that a persistent period of well above trend growth is needed to lift wages and inflation given the degree of slack in the economy.”

“Increasingly, the RBA looks set to remain on the sidelines for the foreseeable future.”

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