RBA sees underlying inflation back in the band... in 2020

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The Reserve Bank of Australia (RBA) has just released its quarterly Statement on Monetary Policy (SoMP), including updated forecasts for GDP growth, unemployment and inflation.

Here they are:

Source: RBA

And here are the RBA’s prior forecasts offered in November:

Source: RBA

These forecasts take into consideration a range of considerations including expectations for the Brent crude price, the average price of the Australian dollar trade weighted index (TWI) as well as current market pricing for movements in the cash rate.

That means the new forecasts incorporate the market’s current expectation that the RBA will lift interest rates in early 2019.

As you may have picked up, there’s few changes to the forecasts.

Of note, the RBA now sees underlying inflation — a key determinant on the outlook for interest rates — returning back to within its 2-3% target by June 2020.

While that solidifies the view that the next move in interest rate will be higher, it also points to a central bank that is under no pressure to begin that process in the near-term.

At 2.25%, the underlying inflation forecasts is still not even at the midpoint of the RBA target.

The bank’s headline inflation forecasts — which incorporate all price movements in the ABS’ CPI basket — were left unchanged, including the new forecast offered for June 2020.

It too is only expected to sit in the bottom half of its inflation target.

As the RBA has expressed on several occasions already this week, the expected lift in inflation will be “gradual” in its opinion.

Helping to build those inflationary pressures, it revised down it unemployment rate forecast for June this year to 5.25% from 5.5% in November.

However, it sees it remaining at that level throughout its forecast horizon.

Importantly, 5.25% is also above what is widely perceived to be Australia’s non-accelerating inflation rate of unemployment, or NAIRU — the level where unemployment begin to place upward pressure on wage growth and inflation.

Like the inflation forecasts, that’s a fairly dovish outcome, pointing to the likelihood that wage pressures will remain muted, continuing the trend in recent years.

While inflationary pressures are expected to remain muted, the RBA retains an optimistic assessment on the outlook for economic growth, forecasting that it will push to an above-trend level of 3.5% by June next year before gradually easing lower.

Aside from the new June 2020 figure, the forecasts for GDP growth were unchanged.

If the RBA is correct, it will be a Goldilocks outcome for the economy: strong GDP growth accompanied by low inflationary pressures.

It all points to no urgent need for the RBA to begin lifting interest rates, especially in the near-term. Nor does it suggest the tightening cycle will be aggressive. Quite the contrary, in fact.

NOW READ: The RBA just gave plenty of reasons why it’s in not rush to lift interest rates

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