Statement on Monetary Policy: Another Trim to Growth Forecasts

The key points in this report are:

 

  • Today’s Statement on Monetary Policy confirmed that the Reserve Bank (RBA) has once again downgraded its near-term outlook for the economy. Further downside risks to the outlook suggest that the cash rate could be cut further. The RBA kept the cash rate at 0.75% on Tuesday, but left the door open for further easing should the economy fail to show meaningful signs of improvement.
  • The downgrade in the growth forecast for 2019 had already been flagged in previous communications. The forecast for next year and for 2021 remained unchanged.
  • The RBA expects GDP growth to be 2.25% in 2019 and 2.75% in 2020. It expects inflation to remain below its 2-3% target band until December 2021.
  • On the labour market, the RBA appears to have conceded that the unemployment rate is likely to remain well above the level at full employment (which it estimates is 4.5%) for the remainder of the outlook. This spare capacity in the labour market means that it no longer expects a lift in wages in the near-term. It now expects the unemployment rate to remain steady at 5.2% until it begins to drift lower in mid-2021 before reaching 4.9% in December 2021.
  • The Statement noted that the evident spare capacity in the economy and lack of progress in bringing inflation to its target range contribute to the case for further easing. The Board judged that there is not a case for “holding some stimulus in reserve to address potential future shocks”. Its acknowledgement that further easing could begin to have less of an impact as rates approach the effective lower bound highlighted that the RBA has been at least contemplating unconventional monetary policies.

 

Please see the attached report for more information.



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