The RBA just flagged a downgrade to its inflation forecast

  • The RBA left official interest rates on hold at 1.5%. Rates have now been unchanged since August 2016.
  • Ahead of this Friday’s Statement on Monetary Policy, the RBA flagged a downgrade to its 2018 headline inflation forecasts. The bank still expects inflation to pick up in 2019 and 2020.
  • The bank reiterated its cautious view towards the housing market, but remains broadly upbeat on the economy’s growth prospects.

The Reserve Bank of Australia (RBA) kept official interest rates unchanged at 1.5% in August, extending its current streak of policy inertia into a 22nd consecutive meeting.

The last time the RBA moved rates was in August 2016, and market pricing for a full 25 basis point increase has now extended all the way to 2020. That was reflected in the latest statement, as the RBA still looks set to keep rates on hold for the foreseeable future.

“The low level of interest rates is continuing to support the Australian economy,” the RBA said.

“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Just like the July statement, the entire final paragraph was identical to the previous month.

Based on the wording in the statement, the RBA looks likely to downgrade its 2018 inflation forecasts at this Friday’s quarterly Statement on Monetary Policy (SoMP).

“The central forecast is for inflation to be higher in 2019 and 2020 than it is currently,” the RBA said.

“In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1.75%.”

In the previous SoMP in May, the RBA forecast headline inflation would run between 2-2.25% for the remainder of 2018.

The Australian dollar was little-changed following the release.

In the previous month’s announcement, the RBA removed the words “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast” for the first time since April 2016. The passage was also held out of the August statement.

Committee members maintained their upbeat assessment of the labour market, highlighting the recent jump in vacancy rates and taking a positive view of other leading employment indicators.

“Employment growth continues to be faster than growth in the working-age population,” the RBA said.

“A further gradual decline in the unemployment rate is expected over the next couple of years to around 5%.”

Neither of the lines on employment were included in the bank’s July statement.

The May SoMP forecast the unemployment rate to run at 5.5% for the remainder of this year, before declining to 5.25% in 2019.

The RBA noted that wage growth remains low, and this is “likely to continue for a while yet”, however it remains optimistic that improvements in the economy “should see some lift over time”.

In addition, the bank repeated its assertion from the July statement that wage growth “appears to have troughed”.

On the subject of the housing market, the RBA noted repeated the previous month’s observation that house prices in Sydney and Melbourne continue to decline.

However, the line in the July statement that “nationwide measures of housing prices are little changed over the past six months” was removed. The bank also noted the ongoing decline in credit growth.

“Housing credit growth has declined to an annual rate of 5.5%. This is largely due to reduced demand by investors as the dynamics of the housing market have changed,” the RBA said.

In line with the July statement, the bank noted that funding costs for banks have risen since the start of the year, but added that “they have declined somewhat since the end of June.”

In addition, “these higher money-market rates have not fed through into higher interest rates on retail deposits.”

“Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.”

The RBA also added in its August statement that “there is competition for borrowers of high credit quality”. The RBA made no specific reference to the recent round of mortgage rate cuts by the big banks.

Looking at the Australian economy more broadly, the RBA kept its growth forecasts unchanged.

“GDP growth is expected to average a bit above 3% in 2018 and 2019,” the RBA said, repeating its outlook from the previous month.

The central bank also reiterated that it’s monitoring uncertainty on global markets stemming from US-China trade tensions, and moderated its wording slightly on the outlook for the Chinese economy.

While the RBA cautious view towards the housing market remains firmly entrenched, it continues to take a broadly positive view towards the domestic economy.

In addition to its forecasts for economic growth and unemployment, the bank again highlighted that non-mining investment is rising and high levels of infrastructure spending are helping to support the economy.

The full August RBA statement can be accessed here.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.