- The RBA sees Australian economic growth returning to trend levels in the years ahead, meaning progress in lowering unemployment and boosting inflation may stall.
- It has nominated seven risks to that view: six to the downside and just one to the upside.
- The bank did not nominate additional fiscal stimulus from the federal government as an upside risk.
- Financial markets are fully priced for a 25 basis point rate cut to be delivered by the end of the year.
The RBA now sees weaker economic growth, sluggish wage growth and slower progress in lifting inflation and lowering unemployment in the years ahead than it did just three months ago, helping to explain why it now has adopted a clear neutral bias on the outlook for Australia’s cash rate.
The next move could now be in either direction, according to the bank, a view in stark contrast to late last year when it saw the next move as likely to be higher.
While it sees no need to adjust the cash rate in the near-term, financial markets do with the prospect of a 25 basis point rate cut now deemed to be a certainty by the end of the year.
That reflects scepticism that the RBA forecasts will be achieved, even with the downgrades made by the bank today.
It’s little wonder why markets, collectively, have adopted that view given the risks cited by the RBA in the final section of today’s Statement on Monetary Policy.
Of the seven it nominated, six are to the downside.
Here’s the list:
- Trade tensions remain a material risk to the global growth outlook and other political risks have increased.
- It is uncertain how policies in China will balance supporting growth and addressing financial risk.
- A significant tightening of global financial conditions could have real effects.
- Domestically, the outlook for consumption remains a key source of uncertainty.
- Weaker housing construction and prices could have pervasive economic effects.
- Labour market conditions could tighten faster than expected.
- A number of other factors could lead to lower inflation than forecast.
Only the prospect of a strengthening in domestic labour market conditions is cited as an upside risk, with the other six carrying the potential to see the economy perform even worse than the RBA already expects.
Given the RBA expects that GDP growth will slow to trend in the coming years, meaning downward pressure on unemployment and upward pressure on inflation may not occur, should any one or more of these risks materialise, it may have very little option but to cut interest rates to help bolster the economy should the government be unwilling or unable to deploy some fiscal ammunition.
However, with the cash rate already sitting at record-lows, and with the economy already appearing to lose momentum even before these downside risks have materialised, there’s clearly grounds for the government to deliver additional and targeted fiscal support beyond those measures already announced or flagged.
With the RBA clearly reluctant to cut rates further, it could be time for the government to do some of the heavy lifting that monetary policy has been lumped with for the best part of a decade.
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