CBA and Westpac on the RBA SoMP

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CBA senior economist, Gareth Aird:

  • The RBA has left both its growth and inflation forecasts unchanged.
  • Core inflation is forecast to lift gradually to around 2% in early 2019 and to 2¼% by mid‑2020.
  • The RBA have a very shallow downward trajectory for unemployment that glides towards a touch above 5% by mid‑2020.
  • We have the RBA cash rate on hold at 1.5% until Q4 2018 when we have a hike pencilled in.

As far as the quarterly Statement on Monetary Policy (SMP) goes, today’s report was as low key as it gets. The RBA continues to expect growth to lift a little over the next two years. And inflation is expected to rise “gradually”. The Bank’s forecast profile for both inflation and growth are unchanged from the November SMP, as expected. The RBA’s extensive use of the word “gradual” in the Statement is a signal that the Board is in no hurry to lift the cash rate despite the overall economy continuing to improve. As such, we think they retain their neutral bias.

Recent communication out of the RBA seems to have struck a helpful balance between taking an optimistic stance on the economic outlook while managing to hose down interest rate expectations. We say “helpful” as the Bank’s positive tone on the economy has not put upward pressure on the AUD. That’s because they have signalled clearly that rates are not going up anytime soon. This was not always the case last year when on more than one occasion the RBA’s rhetoric contributed to short term spikes in the exchange rate.

The RBA’s growth profile has the economy running above potential by H2 2018, when mining investment is expected to stabilise. As such, the output gap is forecast to gradually decline as labour market slack recedes. Positive contributions to growth are forecast to come from LNG production, infrastructure spend, a continued lift in non‑mining investment and consumption. On the latter, the Bank expects growth in household consumption to be lower than the recent average. We agree (see here).

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Core inflation is forecast to only get to 2%pa by early 2019. Headline inflation should be 25bps higher due to the tobacco excise. A lift in wages growth is clearly central to their expectation that inflation will gradually lift. The RBA expects wages growth to lift “gradually”, but also lists it as one of the “Key Uncertainties”.

In summary, it looks like more of the same from a monetary policy perspective over the next six months. Rates will stay on hold until both wages growth and core inflation are on a sustained upward trend. And that still looks to be some way off. The Governor all but confirmed that rate hikes are not happening in the near term in his optimistic yet dovish speech last night that emphasised:

(i) the global reduction in monetary policy stimulus “does not mean that interest rates need to move in lock‑step with one another” (i.e. policy does not need to be tightened in Australia just because stimulus is being reduced globally); and

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(ii) (ii) that“we are still some way from what could be considered full employment”.

We retain our call for a Melbourne Cup day rate hike.

Westpac senior economist, Matthew Hassan:

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Reserve Bank growth and inflation forecasts largely unchanged – consumer and wage uncertainties dominate; Bank to take its time assessing what are expected to be gradual shifts.

The Reserve Bank has just released its February Statement on Monetary policy. As foreshadowed by the Governor’s decision statement earlier in the week and speech yesterday, key forecasts are unchanged from its November report.

GDP growth is forecast to rise from 2½% in 2017 to 3¼% in 2018 and 2019. Underlying inflation is forecast to rise only gradually, holding at 1¾% in 2018, then lifting to 2%, the bottom of the RBA’s target range, by 2019. These core views are as per November.

The only change to its reported forecasts is around the unemployment rate which is now expected to hold at 5¼% throughout 2018 and 2019 – previously the Bank had the unemployment rate holding at 5½% through to mid 2019, ticking down to 5¼% by December 2019. The shift reflects a lower starting point with the Bank still describing the outlook as a gradual decline, suggesting point estimates are being affected by rounding and that the expected moves are within the 0.25ppt range that triggers estimates to round one way or another. In a similar vein, the Bank’s discussion of the inflation outlook notes a “marginal increase to reflect the expectation that spare capacity will decline a bit further than previously forecast” that presumably is also within the range of rounding and hence has not resulted in a change to published point forecasts.

As is usual practise in February and August, the Bank has extended its forecast horizon by another six months with forecasts now running out to June 2020. These have growth ticking down slightly to 3% and underlying inflation ticking up to 2¼%. The former reflects the roll off of export boosts relating to LNG production. The inflation figure confirms an expected return to the 2-3% target range that was implied by the Bank’s rhetoric in previous statements.

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As always, there are a few interesting snippets in the detailed discussion. While the overall growth forecast is unchanged from November, weaker expectations for consumption are offset by stronger expectations around business investment and public demand.

As conveyed elsewhere, the consumer forecast represents a significant uncertainty, particularly around household incomes. The statement notes that September quarter wage data was slightly weaker than expected, but may have been due to temporary factors that reversed in the December quarter. The Bank also notes rollovers to new enterprise wage agreements continue to exert downward pressure on wages growth and that the size of new wage claims will provide an indication of any recovery in wages growth. Wages growth continues to be a key uncertainty around the outlook for both demand and inflation.

The main themes in the rest of the document are as per the Governor’s decision statement and speech. The global backdrop has improved but the RBA’s expectations for the Australian economy are broadly unchanged with uncertainty centring on the consumer, household incomes and factors affecting labour markets and wages growth. The emphasis is again on the gradual nature of the expected lifts in growth and inflation. The slow pace of shifts, particularly around wages which can often be slow to reflect changes in labour market conditions anyway, the reliance on quarterly data releases such as wages growth, CPI inflation and the national accounts, and the uncertain nature of key parts of the forecast view suggests the RBA is preparing to take its time in assessing how conditions are tracking.

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Westpac continues to see a more challenging year ahead for the Australian consumer and another sub-par year for wider economic growth. While there will be some improvement in incomes and wages growth we expect it to be only slight. More importantly, we also expect consumer spending to again disappoint, falling well short of the RBA’s anticipated return to 3% growth. Accordingly, we see official rates staying on hold throughout both 2018 and 2019.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.