From Tim Toohey and Andrew Boak:
The Governor has continued his effort to push back on pessimism in the economy, acknowledge the limits of monetary policy, and encourage a focus on lifting productivity – and particularly as demographics deteriorate. On the latter, we note a continuation of the discussion on (lower) “potential growth” initiated in Tuesday’s Board Minutes. For our part, in April we lowered our estimate of “potential” GDP growth by some -50bp over the coming years – on the basis that population growth is now slowing quite sharply. Looking ahead, we would not be surprised to see the RBA again lower its growth 2016 growth outlook in its August Statement on Monetary Policy – with a nod to lower potential growth at the same time.vImportantly, however, the Governor’s response in Q&A suggests that a lowering of the assumption on “potential” (and presumably forecasts of the output gap) does not rule a line through further rate cuts. Indeed, he was quick to highlight a desire to reduce the spare capacity in the labour market – noting a preference for a sustained period of “above trend” growth to do this. As it stands, the economy is a considerable distance from “above trend” growth. Domestic demand has lifted just +0.2% over the past 9 months to 1Q2015, with the RBA’s own Board Minutes highlighting on Tuesday that what momentum there was faded into 2Q2015. Consistent with this disappointing growth environment, today’s 2Q2015 CPI report confirmed that annual growth in underlying inflation remains on a weak trajectory. Ultimately, the central bank’s easing bias is explicit, the RBA’s own forecasts are framed on additional easing, and we believe downgrades to these forecasts in the August SMP are consistent with another cut this cycle (GS: -25bp in Aug).
As usual, the when will depend upon when iron ore takes another leg lower. I doubt we’ll get it down by August but second half still looks good.
