The lack of forward policy guidance following the RBA’s decision to cut interest rates on 6 August had most RBA watchers happy to sit on the sidelines and leave their rate calls unchanged. The growth and inflation forecast updates provided in today’s quarterly Statement on Monetary Policy (SMP) have GDP growth “a little weaker” in the near term and inflation “broadly unchanged”. The medium term forecasting horizon has the non-farm economy running in a 2¾-3¾%pa band and underlying inflation in the 2-3% target range. Providing forecast bands rather than point estimates is a fair reflection of the risks beyond the very short term. But it does cloud the policy signal. The RBA sees risks in both directions around the forecasts. So from that perspective there is no strong message from today’s SMP.
The RBA’s qualitative assessment of the outlook involves the economy running below trend until mid 2014, unemployment edging higher for a year or so and the inflation rate remaining in the bottom half of the target range. This assessment indicates a mild bias to ease. But forecasts beyond mid 2014 point to above-trend growth, a levelling out and then decline in unemployment and some upside inflation risks. So the policy decision over the remainder of 2013 will remain data dependent. We will stick with our 2½% cash rate call but will watch labour market trends and the Aussie dollar very closely in assessing the case for any further cut. What does stand out with the RBA’s economic forecasts is not so much the numbers but the extensive list of things that need to go right to achieve those forecasts. This “theme” underlies our own economic commentary and forecasts as well.
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