Daily Commentary BY THE CURVE TEAM –

RBA Will Need to Adjust Forecasts

19th of December, 2018

The minutes from the RBA’s December meeting confirmed that the GDP release the following day would have caught them by surprise. It also has implications for their forecasts and outlook for monetary policy.

Much like the post meeting statement, the minutes from the December meeting saw much more column space devoted to the balance of risks that the outlook faces. This was a step back from the overarching cautiously optimistic tone we had become accustomed to over much of the previous year.

Despite the more balanced commentary, the RBA was still optimistic about the growth outlook and the final Q3 GDP release that was due out the following day. The minutes said specifically that:

“Members noted that the national accounts for the September quarter would be released the day after the meeting. Based on the partial data that were available, GDP was expected to have increased by more than 3 per cent over the year to the September quarter, above most estimates of potential growth and in line with the most recent set of Bank forecasts.”

We now know with the added benefit of seeing the numbers that growth actually fell short of estimates. That in itself wouldn’t have been too bad. However negative revisions to the previous three quarters has opened up a significant gap between actual outcomes and the RBA’s forecasts.

Based on their actual data for Q3, growth would need to surge in the fourth quarter for the RBA’s forecasts to be realised. This is increasingly remote given the data for the quarter has showed a slowing in momentum, not only domestically but internationally as well.

So when February rolls around, the RBA will need to downgrade their forecasts, at least for the the early stages of 2019. The question will be how much they downgrade the longer term outlook. Much of that will be determined to the flow of data over the next month and a half.

What it means, and what market pricing reflects, is that the chance of a rate hike any time soon has completely dissipated.

David Flanagan

Director - Interest Rate Markets