Here's what to look out for in today's RBA SoMP

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  • The RBA will release updated economic forecasts today in its quarterly statement on monetary policy (SoMP).
  • It may increase its expectations for underlying inflation slightly and downgrade its views on unemployment. GDP growth is likely to remain much the same.
  • The SoMP will be released at 11.30am AEST.

It’s been a busy week at the Reserve Bank of Australia (RBA).

On Tuesday, the bank delivered its May interest rate decision, leaving the cash rate unchanged at 1.5% for a record-breaking 19th consecutive meeting.

That event was followed up on Tuesday by a speech from RBA Governor Philip Lowe. He was his usual half-glass-full self.

Today, the crescendo of the RBA action will reach its peak with the release of the bank releasing its quarterly statement on monetary policy, or SoMP for short, including updated economic forecasts for GDP growth, unemployment and inflation looking two years ahead.

As a reminder of what the RBA was thinking three months ago, here’s the bank’s forecasts released in its February SoMP.

Source: RBA

In his speech on Tuesday, Governor Lowe said the latest forecasts “should not contain any surprises, with only small changes from the previous set of forecasts issued three months ago”.

However, that’s unlikely to stop markets from speculating on what the changes mean, especially when it comes to the bank’s projections for underlying consumer price inflation (CPI), a key determinant in the outlook for interest rates.

In the year to March, underlying CPI rose by 2% when rounded, at the bottom of the RBA’s 2-3% annual target and some 25 basis points above where it saw CPI sitting at the end of the June quarter this year.

That hotter-than-expected reading has seen some speculate that the RBA may up its underlying CPI forecasts by 25 basis points today for the end of the June and December quarters in 2018.

If that does eventuate, it could see the RBA lift its projections for underlying CPI in 2019 and 2020, indicating that it sees inflation rising faster than originally thought.

Previously, the bank didn’t see underlying inflation lifting back to within its target band until the first half of 2020.

If the bank does raise its inflation profile in 2019 and 2020 — seemingly unlikely given Lowe said the latest CPI report was “in line with the bank’s expectations” — it will undoubtedly trigger speculation that the RBA may lift interest rates sooner than markets currently expect.

This is especially so, if the bank sees underlying inflation sitting at 2.5% at the end of its forecast projections.

Outside of inflation, it may lift its unemployment rate projection for the end of the June quarter this year by 25 basis points to 5.5%, the level where it currently sits today.

Longer-term, and fitting with its recent commentary, it will likely project that unemployment will slowly move back towards 5%, the level where wage and inflationary pressures are expected to build.

On economic growth, the bank is likely to retain the same views offered three months ago with GDP likely to remain just above 3% this year and next.

Indeed, in its May monetary policy statement, the bank said its central forecast for the Australian economy remains for “growth to “average a bit above 3% in 2018 and 2019.

The RBA will also release updated forecasts for the Australian dollar and Brent crude prices — two inputs that help to formulate its broader economic projections.

Importantly, the bank’s forecasts also incorporate market expectations for official interest rates. Currently, markets aren’t fully priced for a 25 basis point increase until the middle of 2019.

Now that you’ve got the run-down, all that’s left is to find out what changes have been made.

We’ll find out the answer to that question at 11.30am AEST.

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