RBA: Revised inflation and unemployment forecasts point to further cuts – Westpac

Bill Evans, analyst at Westpac, notes that the Reserve Bank Board decided to leave the cash rate unchanged at 1.00% at today’s Board meeting as per expectations.

Key Quotes

“In terms of the signalling of future policy, we were most interested as to whether the final sentence in the Governor’s decision statement would retain the wording “ease monetary policy further if needed”,  we saw in the July decision statement. That wording implied that some time would be required to assess the next move. It contrasted with the June decision statement where “if needed” was not used, indicating a preparedness to cut at the next meeting. In August, “if needed” was again used, and accordingly, we remain comfortable with our forecast that the next rate cut will come at the October meeting rather than the September meeting.”

“The decision statement which precedes the release of the RBA’s revised forecasts on the following Friday can also provide an early indication of those revisions. In this statement, we are given the revisions for growth, underlying inflation and the unemployment rate out to the new forecast horizon of end 2021 (previous horizon ended in June 2021).”

“For growth, the RBA has revised down its forecast for 2019 from 2 ¾ per cent to 2 ½ per cent.”

“For underlying inflation, the previous forecasts were 1 ¾ per cent in 2019, 2 per cent in 2020 and 2 per cent in the year to June 2021.”

“Conclusion

We are very comfortable with our view that the RBA has more work to do. Its revised forecasts paint an increasing challenge around both inflation and unemployment. There is also recognition that growth will be below trend in 2019 and is unlikely to exceed trend in the forecast period.

It still remains possible, that the RBA will choose September as the next date for a rate cut, but given that they must see limited future flexibility, we expect that they will be a little patient by moving next in October, and laying the foundation for another move in February next year, when additional unconventional policies might be used to sharpen the effectiveness of the rate cut.”