Daily Commentary BY THE CURVE TEAM –

RBA Cuts Forecasts, Rates To Follow

13th of May, 2019

As expected on Friday, the RBA cut its forecasts for both growth and inflation, in doing so also flagged that rate cuts are coming.

The RBA released their Quarterly Statement on Monetary Policy on Friday and after weak updated on growth and inflation since their February update, were forced to cut their forecasts.

In the economic outlook section of the SoMP, the RBA trimmed their near term growth forecasts with the economy now expected to grow by 2.75% in 2019 and remain at that level out to mid 2021. Both the headline and trimmed mean forecasts for inflation were also lowered for the months ahead with both expected to be back at the bottom of the target band by year end.

Where things get interesting is that these forecasts are based on a number of assumptions. Some of these assumption include the level of the Australian Dollar, the price of oil and population growth. The key though is the assumption on the movement in the cash rate where the statement said:

“The domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.”

So the RBA downgraded all of its key forecasts even on the assumption that it cuts the cash rate twice. At the time these forecasts were made, the market had a cut priced in for August this year and a follow up one early next year. History suggests that when the RBA adjusts policy, they rarely only move once, so any follow up is likely to be much closer together.

The key to the timing of the first cut will depend on the data. With inflation and growth updates still some way off, the employment data will be crucial over the next couple of months.

This week not only do we get the latest update on employment but we also get the latest quarterly wage update. How the employment data evolves over the months ahead will be the key to the near term outlook for monetary policy.

David Flanagan

Director - Interest Rate Markets