RBA still sees inflation remaining weak until the end of 2018


The Reserve Bank of Australia’s (RBA) quarterly statement on monetary policy (SOMP) has just been released, including updated economic forecasts on the outlook for inflation and economic growth.

Here they are:

For a recap on what the RBA was forecasting three months ago, the table below, supplied by the bank, has all the details.

Of most importance to markets, the bank still sees core CPI, referred to as underlying inflation in the forecasts, as remaining weak, much like the view presented three months ago.

Taking the midpoint of the forecasts offered today, core CPI is expected to remain at-or-below the bottom of its 2-3% medium-term inflation target until at least the end of 2018, even with the rate cut delivered earlier this week.

“The large exchange rate depreciation since early 2013 is likely to continue boosting the prices of tradable items as increases in import prices are gradually passed through to the prices paid by consumers,” says the bank.

“However, domestic factors, such as heightened competitive pressure in retail markets and low wage growth, have put downward pressure on retail inflation over recent years and are expected to persist for some time.”

The bank also acknowledged that “wage growth is low, reflecting spare capacity in the labour market, a decline in near-term inflation expectations and downward pressure on firms’ profits as a result of the decline in the terms of trade”.

Source: RBA

It is worthwhile noting that the forecasts are based off a variety of technical assumptions, including the level of the Australian dollar, crude prices and market expectations for interest rates.

Markets currently have another 25 basis point cut priced in by the middle of next year. So even with two rate cuts this year, and with markets expecting another, the RBA still forecasts that core inflation will remain below target over the years ahead.

The RBA stipulates that “this assumption does not represent a commitment by the Reserve Bank Board to any particular path for policy”. In other words, it does not automatically imply that another rate cut is coming.

On the assumptions, the bank made a small upgrade to its Australian dollar forecasts, seeing an average rate of 76 cents for the AUD/USD compared to 75 cents in May. It also sees the Australian dollar trade weighted index at 63.5, up from 62.5 forecast previously.

Its forecasts for Brent crude were lowered slightly.

Aside from an upgrade to its near-term GDP growth forecasts, the bank is still sees growth of 2.5 to 3.5% until the end of 2017. Looking further ahead, it forecasts growth of between 3-4%, above the level deemed by many to be Australia’s new trend growth rate.

“Low interest rates and gains to employment are expected to continue supporting household demand, despite relatively modest growth in household income over the next year or so,” said the bank. “Consumption growth is projected to remain close to its long-term average over the forecast period, consistent with the forecasts in the May Statement.”

Source: RBA

Despite the weak outlook for inflation, something that will do little to dispel speculation that an additional rate cut could arrive in the medium-term, the Australian dollar has rallied following the release of the SOMP, rising to as high as .7653 moments ago.

Stocks are largely unchanged while bond futures have strengthened a touch.

Australian cash rate futures currently put the odds of an additional rate cut being delivered in November at around 50%, unchanged from the levels seen prior to the release.

The limited market reaction suggests there are few surprises to come from the updated forecasts offered by the bank.

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