RBA slashes inflation forecasts, paving way for another rate cut

Photo: Kill Bill/ IMDb.

The Reserve Bank of Australia has just released its quarterly statement on monetary policy (SOMP), including its forecasts for inflation and GDP growth in the years ahead.

Here they are:

And for comparison, here are the bank’s previous forecasts offered in its SOMP released in February.

Following the release of Australia’s March quarter CPI report last week — something that revealed core inflation rose by just 1.55% over the past year, the lowest level on record — the bank has taken an axe to its core inflation forecasts all the way out to June 2018.

Underlying inflation is now seen at 1.5% by the end of the current quarter, down from 2% in February, indicating that the bank does not expect a near-term rebound in inflationary pressures.

By the end of this year it’s now seen in a range of just 1-2%, below the RBA’s 2-3% medium-term inflation target. In its previous forecast the bank saw it sitting between 2-3%.

Looking further out, core inflation is expected to pickup only modestly, increasing to between 1.5-2.5% by the end of 2017. The mid-point of this forecast range is still at the bottom of the bank’s inflation target.

Outside of inflation, the bank left its GDP growth projections from the end of 2016 out to mid-2018 unchanged. The only tweak was to the June 2016 forecast with the RBA now seeing growth of between 2.5-3.5% compared to 2-3% in February.

Writing before the release of the SOMP, Sean Callow, senior FX strategist at Westpac, noted that the “inflation forecasts are, unusually, much more important than the growth forecasts for the policy outlook”.

The changes to the inflation forcasts are significant when it comes to outlook for monetary policy, and does little to dispel the notion that the bank will follow up May’s rate cut with another, perhaps as soon as August.

Crucially, the final sentence to the overview in the SOMP says “the Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time”.

In the wake of the SOMP’s release, the Australian dollar has tumbled, dropping to as low as .7412. It is now trading at the lowest level since March 9, and has now fallen 5.5% since April 21.

Cash rate futures have also strengthened, indicating a greater probability that a further interest rate cut is coming. Based on current pricing, it’s seen as a 73% probability that interest rates will be reduced to 1.50% when the RBA meets on August 2.

Here’s the Australian dollar daily chart, courtesy of Investing.com.

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