RBA Statement on Monetary Policy - Rising Risks

  • After the RBA Governor delivered his market-moving speech on Wednesday, there was not too much new to anticipate from today’s RBA’s quarterly Statement on Monetary Policy (SoMP). What the SoMP has done is add more detail to the flavour of Lowe’s speech.
  • Lowe revealed that the RBA had shifted its guidance of monetary policy to a neutral policy setting, away from a bias to tighten. With greater downside risks to the domestic and global economy and more uncertainty to the outlook, the RBA is no longer convinced the next move will be up. However, it is not convinced the next move will be down either. Indeed, it sees the risks around the next move in the cash rate as evenly balanced.
  • The SoMP underscored the probabilities of scenarios in which the cash rate would need to be adjusted up and those in which it would need to be adjusted down.
  • These scenarios have in common the labour market – it is in the spotlight and will be the key in determining the next move in the cash rate.  
  • Further progress in reducing unemployment would bring inflation into the target range and if this scenario comes to pass, a higher cash rate would become appropriate at some point. However, other scenarios, in which the labour market and consumption growth are weaker than currently expected, are also possible. This scenario would lead to higher unemployment and the inflation rate would struggle to return to target. Under this scenario, a cash-rate cut becomes more likely.
  • Due to the recent soft domestic data and the weak set of GDP numbers in the September quarter, the RBA has cut both its GDP growth and inflation forecasts.
  • Economic growth for the year ended 2019 has been downgraded from 3.25% to 3.0%. For the year ended 2020, it has been cut to 2.75%, from 3.00% previously. The new RBA forecasts have growth above trend this year and at trend in 2020. The RBA continues to see rising business investment and higher levels of public infrastructure spending as the key growth drivers. Our GDP growth forecasts remain a bit weaker than the RBA’s.
  • Lowe had also indicated that it would take longer for inflation to return to the Reserve Bank’s target. Today we learned what he meant by “longer”. The RBA is not expecting headline inflation to return to its 2- 3% per annum target band until June 2020. The RBA previously had projected  inflation at 2% in December 2018 with a gradual rise thereafter.
  • Moreover, while the RBA is still expecting a gradual decline in the unemployment rate to 4.75% over the forecasting horizon, it has pushed out how long it will take for this forecast to come to fruition. It will now take until December 2020, from June 2020 previously.
  • The major piece of domestic uncertainty is consumption. The RBA is watching trends in household income growth closely for clues to the outlook on consumption. The RBA is hopeful that a decline over time in the unemployment rate will generate wage pressures, improving household income growth. However, recent declines in house prices and household debt mean that if an improvement doesn’t come through for incomes, then the outlook for consumer spending looks greyer.
  • We have had an on-hold view for 2019 and 2020 for some time. We are sticking with this view for now, but think the risks of a rate cut have grown. Much will depend on how the data evolves over the next few months. In particular, we will be watching for signs as to whether the recent soft patch of data is temporary or the start of a softer trend.


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