SoMP hedges its bets

Today’s quarterly Statement on Monetary Policy is, like the economy, a balancing act. The RBA’s confirmed its central medium term bias to raise interest rates by confirming its expects above average rates of growth ahead:

In the short term, the GDP outcomes for the next few quarters are expected to be boosted by arecovery in coal production. The Bank’s forecast for GDP growth in 2011 has, however, been lowered to 3¼ per cent. A little more than half of this downward revision reflects the slower-than-expected recovery in the Queensland coal industry, with most of the remainder reflecting slower expected growth in consumption. Domestic demand is, however, forecast to continue to grow strongly, with a large increase in mining investment expected. Overall, GDP growth is expected to be at, or above, trend in 2012 and 2013. The unemployment rate is expected to remain at around 5 per cent for some time, before declining a little towards the end of the forecast period.

It did this despite a 1.25% cut in its forecast for 2011 to 2%. And somehow growth is expected to accelerate to 4.5% next year, which is .25% above previous forecasts.

Ice block’s chance in hell but who am I to judge?

The SoMP also reiterated that inflation remains a concern and raised its targets from 3.25% to 3.5% through to the final quarter of 2011:

In underlying terms, year-ended inflation is expected to pick up over the forecast period. While some moderation in quarterly rates of inflation is expected, it now looks likely that underlying inflation will beat, or above, 3 per cent in 2011. The high exchange rate and subdued consumer spending are putting downward pressure on some prices, although increases in global prices for food and manufacturedgoods as well as a range of domestic cost pressures are working in the other direction. Based on thecentral scenario for the Australian economy, and the technical assumption of unchanged interest rates, underlying inflation is expected to remain relatively high in 2012 and 2013, with the 2012 outcome boosted by around ¼ percentage point by theintroduction of a price on carbon.

In headline terms, inflation is expected to fall back below 3 per cent by early 2012 as the effects of the extreme weather events earlier in the year are reversed. It is then expected to pick up in the latterpart of 2012, back to around current rates, with the carbon price estimated to add 0.7 per centto the general price level. Provided that inflation expectations remain well anchored and thatthere are no second-round effects through higherwage claims, headline inflation is then expected to decline again in 2013 as the once-off effectsof the introduction of the carbon price fall out of the figures.

However, surrounding this central scenario is a lot of analysis of global risks. There’s no need to rehash that here but the bank is clearly very concerned. It is clear too that the SoMp has been recently modified to take account of deteriorating conditions.

The SoMP gives the RBA a bet both ways. It remains on hold to assess the balance of risks and growth pressures.

I have backed Bill Evans prediction of rate cuts later in the year caused by European strife and at this stage see no reason to change.

The full overview is below.

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Comments

  1. I know its Friday but does the comments on this post reflect the MB readers overall view of the RBA’s view. Surely they can only tell MB readers what they know or are wrong. The fact that they are continually wrong even when trying to have a view both ways demonstrates the level of navel gazing that goes in in Martin Place. Paid up members of the politico-housing complex I suspect.

  2. …I tell all these things to my wife, and she wonders who the powers that be don’t have better sense – the sort of “Why on earth do they think these sort of things?” and “How can they think these sort of things given all other headwinds that are coming?”

    TPTB are losing more and more cred amongst common folk, i have observed – many are starting to think they really don’t have much of a clue at all…so why are we trying to engineer things centrally as if we do understand?

  3. “The unemployment rate is expected to remain at around 5 per cent for some time, before declining a little towards the end of the forecast period.”

    I’ll bet money that it doesn’t remain around 5% for some time before declining.