Daily Commentary BY THE CURVE TEAM –

Updated RBA Forecasts May Prove Overly Optimistic

11th of February, 2019

There are some important data releases this week, but the main focus has been the Statement on Monetary Policy released last Friday. We saw the downgrades to their forecasts as expected, however they still look a little optimistic.

As we expected, the near-term forecasts for GDP and inflation were heavily downgraded because “domestic economic conditions have been a bit softer than were expected at the time of the November Statement.” Despite the recent run of weak data, the RBA still believe growth to be slightly “above estimates of potential growth.”

As a result of this above-trend growth and sound employment figures for December, the RBA expects a strong labour market in the future with unemployment hovering around 5%. This forecast is key because strong labour market conditions are the RBA’s base for wage growth.

This boost in wage growth is expected to increase household income and provide a counterweight to the wealth effect of the housing price correction, which has become a “significant area of uncertainty.” However, it’s hard to reconcile the strong labour market forecasts given current soft leading indicators of employment and the RBA’s lower forecasts for growth.

What’s perhaps most interesting is that “the domestic forecasts are conditioned on the technical assumption that the cash rate evolves in line with market pricing”, and markets are almost fully pricing in a cut, according to the chart.

Some of the RBA’s statements will be put to the test this week with the NAB Business Survey and Westpac Consumer Confidence set to be released later this week. Moving offshore, China’s trade data is set to be released on Thursday and will provide some insight into the global outlook, which is also key for the domestic outlook.

Neyavan Suthaharan

Client Services Officer