RBA miles behind the growth curve

Macquarie is spot on:

wqefqwdf The February Board meeting will consider updated forecasts for growth and inflation before making the first rates decision of 2017. Over the days that follow, the RBA staff will make adjustments before publishing the February Statement on Monetary Policy (SoMP).

 Our base is that the RBA will keep rates on hold at this meeting, with a cut coming in May. However, whilst there are pressures from a financial stability perspective, the forecast backdrop is one that could easily see the RBA justify a surprise rate cut.

 The RBA will extend their forecast horizon in the February SoMP, out to June-2019. That’s helpful, given the downside pressures on the inflation outlook.

 Although the 4Q16 CPI outcome was in line with the RBA’s November SoMP expectations, outcomes for other key forecast variables all represent a source of downside risk to the inflation outlook.

 The most obvious of these is the 3Q16 GDP outcome, which saw the economy contract by 0.5%QoQ – only the 4th contraction in 25 years. The outcome was well outside the RBA’s range of forecast outcomes. And although partial economic data for 4Q16 suggests that Australia has avoided a recession, it is not pointing to a strong growth rebound. On net, the economy is smaller, and weaker, than the RBA was expecting.

 Weaker outcomes for the economy are also evident in the labour market. The unemployment rate has risen over 4Q16, finishing 2016 at 5.8%. We estimate that the RBA’s forecast had incorporated a decline in the unemployment rate to 5.6%.  Lastly, the currency has been appreciating since the November SoMP. On a trade-weighted basis, the A$ is at a 2-year high, and is more than 2% higher than the November SoMP forecast.

 Elevated commodity prices are a key support for the A$. Indeed, the RBA’s commodity price index, in US$ terms, is more than 50% higher than a year ago. However, as we highlighted in our outlook (2017 outlook – Finishing in style) there may be delays, or degraded, transmission of commodity price gains into domestic demand in the current episode – leaving the RBA with an A$ that’s looks right based on commodities, but remains wrong for the economy.

 Net outcome: On balance, we think the RBA will downgrade their near-term growth outlook slightly to reflect the weaker starting point, but maintain their expectation for a return to above-trend growth. And as such, maintain an expectation that inflation returns to the mid-point of the target band – albeit at a slightly slower pace than previous, but still within the (now extended) forecast horizon. Net-net, just enough to keep rates on hold, whilst keeping the door open for a May, or later, rate cut.

No-brainer hold today. Forced to cut later. Just waiting for APRA to wake up.


  1. APRA aren’t sleeping, they are dead. Property will continue raise at an alarming rate and nothing will be done apart from rates slashed further to stem any further increases in mortgage rates.

  2. There has to be some chance of a cut today, with the recent property industry doves that have joined the board. Squeaky wheel will get its oil.

  3. That’s about it. I can’t believe some people are talking about hikes this year! Nothing has changed:

    – Continued mining capex (and jobs) wind down
    – Car manufacturing closure
    – Housing construction peaking/falling back (the big one for mine)

    That’s a nasty cocktail.

    • This is the problem. RBA has been positioning for some disaster looming on the horizon, accelerating into some imagined future drop off in activity while the present is actually pretty good. Reality is housing construction pipeline is strongest its ever been (notwithstanding approvals which will rise again easily if demand warrants), manufacturing activity is best in years, mining is in a long expected “exploitation phase” which is hugely profitable and now stable in employment terms.

      Meanwhile the other reality (which holds the most serious future risk if not dealt with promptly) is an enormous housing bubble.

      • +1 It is insane that the RBA are considering cutting interest rates when we have double digit house price inflation in Sydney and Melbourne
        Lower interest rates are not a solution to the problem
        Lower interest rates ARE the problem

      • The median Sydney house grew in value by around $200,000 over the last 12 months (on CoreLogic basis). Great so wealth effect is now baked into the numbers for retail sales and consumer confidence, and gave quite a small boost to growth. However this year’s homebuyers now have to take on an extra $200,000 in debt and correspondingly larger mortgage repayments. How stimulatory is that likely to be? Oh I know, lets cut the rates again. Brilliant.

      • I agree. Central Banking is in a massive crisis. Their mandates are effectively to maintain a constant party (full employment, moderate inflation) and so they keep spiking the punchbowl even though we’re seeing the harmful consequences; namely crippling wealth inequality. The transfer of wealth from non-asset holders to asset holders (young/poor to rich/old). There’s a growing awareness of the issue, but we’re already several miles down the rabbit hole due to these lunatic Keynesian-motivated policies. “The answers lay back in time”.