The RBA has downgraded its inflation forecast for this year

(Brendon Thorne / Getty Images)
  • The RBA released its quarterly Statement on Monetary Policy this morning, with an updated set of economic growth projections.
  • The central bank confirmed it has downgraded its 2018 inflation forecast, after flagging the change in Tuesday’s rates decision.
  • Its longer term outlook for inflation was little-changed. The bank now expects core inflationary pressure to remain low all the through to the end of 2020.

The RBA has just released it’s quarterly Statement on Monetary Policy (SoMP), with updated forecasts for inflation, unemployment and economic growth.

Here are the new forecasts:

Source: RBA

And as a frame of reference, this is what the bank’s forecasts looked like three months ago:

As RBA Governor Philip Lowe flagged in Tuesday’s monetary policy meeting, the central bank has downgraded its inflation forecast for 2018.

The Australian dollar was little-changed immediately following the release.

The RBA now expects both core and underlying inflation to rise by 1.75% to December 2018, down from the May forecasts of 2.25% and 2% respectively.

Beyond that time frame, the central bank kept its inflation forecasts relatively unchanged. Previously, it expected both core and underlying inflation to reach 2.25% by the middle of 2020.

That’s still the case, and the bank now expects the same growth rate to be maintained all the way through to December that year.

In Tuesday’s rate announcement, Lowe also said that “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5%”.

The bank has maintained its forecasts that the unemployment rate will stay at around 5.25% through to June 2020, before dropping to 5% in December.

In a speech on Wednesday following the rates decision, Lowe added some context around the RBA’s near-term inflation downgrade.

“Electricity prices in some cities have declined recently after earlier large increases, and changes in government policy are likely to result in a decline in child care prices as recorded in the CPI,” Lowe said.

“There have also been changes to some state government programs that are expected to lead to lower measured prices for some services.”

The central bank slightly bumped up its forecasts for GDP growth in Q2 2018, to 3% from 2.75%. Longer-term, the bank’s growth projections were little-changed.

It still expects GDP growth to average 3.25% over the next two financial years, before falling to 3% in June 2020 and remaining at that level through to December.

In Tuesday’s rates decision, Lowe said “the central forecast is for inflation to be higher in 2019 and 2020 than it is currently”.

Some economists speculated that may have been an indication the RBA was set to lift its inflation forecasts for 2019 and 2020 after the near-term downgrade.

However, there were no changes to the longer-term projections. The central bank still expects underlying inflation to return to the bottom end of its 2-3% target range by 2020.

And given today’s projections were the first to include a time frame out to December 2020, the forecasts confirmed that underlying inflation pressures are expected to remain low for at least the next two and a half years.

The latest set of projections confirmed that the RBA still looks set to keep interest rates on hold for the foreseeable future.

While Governor Lowe reitearted in his speech on Monday that the next move in rates is more likely to be up than down, data from ANZ last Friday showed market pricing for the next RBA rate hike has now been extended all the way to 2020.

“Higher interest rates are likely to be appropriate at some point, if the economy continues to evolve as expected,” the RBA said today.

“Given the gradual nature of the improvement, however, the Board does not see a strong case to adjust the cash rate in the near term.”

Attention will now turn to Wednesday’s quarterly wage price index for clues as to whether wage growth has now “troughed”.

After years of chronically low wage growth, quarterly wage data has now taken on central importance in terms of the outlook for any signs of inflationary pressures in the economy.

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