Release the doves! The RBA’s Statement on Monetary Policy is out and the bank has realised that it has stuffed it:
The forecast for underlying inflation has been revised lower, reflecting the lower-than-expected outcome for inflation in the March quarter and an expectation that domestic cost pressures, including labour costs, will pick up more gradually than anticipated at the time of the February Statement. The outlook for domestic cost pressures is a key source of uncertainty. Despite above-trend growth in economic activity and improvements in labour market conditions over the past year, it is possible that domestic cost pressures may weaken further, and so inflation may not pick up as expected. However, it may be that the strengthening in the labour market embodied in the forecasts is associated with growth of labour costs picking up sooner or by more than is currently forecast.
The substantial exchange rate depreciation over recent years is expected to continue to place some upward pressure on inflation for a time. While the exchange rate is assumed to remain around current levels over the forecast period, it may respond to a number of influences, including any unanticipated changes to the outlook for growth in China, commodity prices or the monetary policy decisions of the major central banks. It therefore represents a significant source of uncertainty for the forecasts of inflation, as well as for the outlook for growth in activity. For some time, the Reserve Bank Board had noted that the inflation outlook provided scope for a further easing in monetary policy. After taking account of developments over recent months, the Board’s assessment at its May meeting was that the outlook for economic activity and the unemployment rate was little changed, but that the inflation outlook was lower than earlier anticipated. At the same time, the Board took careful account of developments in the housing market, noting the effects of supervisory measures to strengthen lending standards, the recent easing in housing credit growth and the abatement of strong price pressures. Taking all of these considerations into account, the Board judged that the prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by further easing of monetary policy. Accordingly, the cash rate was reduced by 25 basis points. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.
