Daily Commentary BY THE CURVE TEAM –

RBA To Tweak Forecasts as Record Run of Stability Continues

8th of August, 2018

The RBA extended the record for stability in the cash rate to a record 24 months after leaving the cash rate at 1.50% for the 22nd meeting in a row. While there wasn’t a wholesale change to their core message, there was enough subtle shifts in rhetoric to keep everyone interested in what they had to say.

Of the three major forecasts that the RBA updates each quarter, only one is expected to remain unchanged on Friday when the their latest update is due. According to Governor Lowe’s statement following the decsion to leave the cash rate on hold yesterday:

“The Bank’s central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 per cent in 2018 and 2019.”  

However Governor Lowe did highlight that there will be adjustments to the other two key forecasts when the Quarterly Statement on Monetary policy is released on Friday this week.

While the long term forecasts for inflation remain largely unchanged “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 1¾ per cent.”

To counter this, Lowe also highlighted that their unemployment forecasts are a bit firmer than three months ago with the statement saying that “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent”.

The interesting thing about the RBA’s central forecast is that the expected the gradual pick up in growth to eat into spare capacity and in turn lift wages and overall inflation. The problem is that unemployment is only expected to get to 5% by the end of the forecast period, a level which is consistent with the what has long be considered the NAIRU (non-accelerating inflation rate of unemployment).

So by definition, a fall in the unemployment rate to 5%, shouldn’t have an impact on inflation if in fact the long held assumption that the NAIRU is in fact still 5%. Recent evidence from a number of other developed nations, where much lower unemployment rates are yet to result is a significant lift in inflation, is that the NAIRU may now be lower than previously has been the case.

We will have to wait an see on that one. In the meantime the market expectations for the next lift in the cash rate has drifted even further since yesterday’s announcement.

David Flanagan

Director - Interest Rate Markets