RBA sees slower progress in lowering unemployment

GREG WOOD / AFP / Getty Images

The Reserve Bank of Australia (RBA) has just released its quarterly statement on monetary policy (SoMP), including updated economic forecasts for inflation, unemployment and GDP growth.

Here are the bank’s new forecasts.

Source: RBA

And, as a reminder of what the bank’s forecasts were three months ago, here’s the projections it offered in the February SoMP.

Source: RBA

As suggested by the RBA Governor Philip Lowe earlier in the week, there are few major surprises to come from the report.

The bank left its GDP growth profile unchanged from the February SoMP, seeing real GDP growth increase 3.25% year-on-year by the end of the 2018 and 2019 calendar years.

Reflecting a higher starting point, the bank upped its underlying inflation forecasts this year by 25 basis points to 2%. Crucially, however, it doesn’t see it returning to within its 2-3% annual target until the first half of 2020, unchanged from the view offered three months ago.

“The forecasts reflect the expected decline in spare capacity in the economy as GDP growth picks up and as the labour market moves towards full employment,” the RBA said.

“A key area of uncertainty for the inflation outlook is around how quickly wages growth picks up in response to improving labour market conditions.”

Helping to explain the lack of inflationary pressures, it revised up its unemployment rate forecasts for this year by 25 basis points, seeing the unemployment rate at 5.5% by the end of 2018.

That’s the level where it currently sits, and well above the 5% level many believe it will need to fall to before wage and inflationary pressures begin to build.

“Despite very strong employment growth, there has been little change in the unemployment rate since mid-2017. This is because, on net, the increase in demand for labour has been more or less met by an increase in the number of people in the labour force,” the bank said.

It sees the unemployment rate slowly edging lower to 5.25% by the middle of next year, a level where it is expected to remain until at least the end of the June quarter of 2020.

In helping to formulate those forecasts, the RBA lowered its Australian dollar projections, seeing the AUD/USD and Australian dollar trade-weighted index (TWI) averaging 75 cents and 62 respectively over the forecast horizon, down from 78 cent and 64 three months ago.

It also sees Brent crude prices averaging $US71 per barrel over the same period, up significantly from $US64 per barrel in the February SoMP.

Population growth is also expected to remain strong with increases of 1.7% and 1.6% expected in 2018 and 2019 respectively.

Financial markets are largely unchanged on the news, reflecting that while the next move in official interest rates is likely to be up, not down, it’s still likely to be quiet a while before policy is tightened.

Indeed, while the RBA still sees economic growth sitting above 3% this year and next, a level that should help to reduce excess capacity in the economy and lead to faster wage and inflationary pressures, progress in achieving this will be slow, at least in the RBA’s opinion.

And with unemployment expected to remain above 5% throughout its forecast horizon, any lift in wage pressures, if any, will likely be incredibly modest.

Rates are on hold until the data confirms otherwise, be it to the upside or downside.

Attention will now turn to the release of Australia’s March quarter wage price index on May 16 for clues as to whether wage growth has now bottomed.

The RBA thinks they have they have, although its not sure how quickly any subsequent lift will be.

“Information from the Bank’s liaison program suggests it is not likely that wages growth will decline further,” it said.

“Importantly, there is uncertainty around the level of the unemployment rate that is consistent with full employment. If experience overseas is any guide, this level of the unemployment rate could turn out to be lower than previously assumed.

“The outlook for a pick-up in inflation depends on a gradual pick-up in wages growth.”

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