Breaking: RBA's Monetary Policy Statement said unemployment would have to be moving “materially higher” to hike


In its quarterly economic outlook, the Reserve Bank of Australia (RBA) said unemployment would have to be moving "materially higher" to warrant another cut in interest rates, adding to the impression it was in no hurry to ease again, Reuters reports:

"Updated forecasts in the RBA's 80-page outlook showed it now expected economic growth would only reach 1.9% in the year to June, down from a previous prediction of 2.6%.

Yet it expected rebuilding from the bushfires to boost growth in the second half of the year, along with a pick up in consumption as rising home prices lifted household wealth.

As a result it forecast growth would accelerate to 2.7% by the end of this year and to 3.0% by the close of 2021.

This pick up would lead to a decline in unemployment, but only very gradually. It saw the jobless rate ending the year at its current level of 5.1%, before dipping to 4.9$ at the end of 2021 and 4.8% by mid-2022."

That glacial drop was unlikely to deliver any recovery in wage growth, however, which was seen running at a sub-par annual pace of 2.3% this year and 2.2% next.

Inflation was expected to rise only slowly, with the underlying rate forecast at 1.8% by the end of this year and 1.9% in 2021. Only my mid-2022, did the RBA expect inflation to reach the bottom of its 2-3% target band.

Given this outlook, RBA Governor Philip Lowe said the bank's policy-making Board had considered the case for further policy easing, following three reductions last year that had left interest rates at a record low of 0.75%.

The Board decided to leave rates unchanged at its first meeting of the year this week, noting that the benefits of easing had to be balanced with the risks of very low interest rates.

Those risks included fuelling a borrowing boom for housing at a time when home prices were already rising strongly, particularly in Sydney and Melbourne.

Lowe noted the balance of risks on easing could shift according to how the economy performed.

"If the unemployment rate were to be moving materially higher and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy," he wrote in the outlook.

 

Key notes

RBA Board has been discussing case for further easing.
RBA says need to balance benefits of easing with risks of very low rates.
RBA: Risks include fuelling more borrowing when home prices already in strong upswing.
RBA: Increasing concerns internationally about the effects of low interest rates.
RBA: Balance of risks might shift if unemployment rate were to be "moving materially higher".
RBA: And if there was no further progress being made on lifting inflation.
RBA: Policy expected to remain accommodative for some time.
RBA cuts near-term growth forecast to reflect drought, bushfires, coronavirus.
RBA: "very uncertain" how long impact of coronavirus will last.
RBA: Cuts GDP forecast for Q4 2019 to 2.0% (vs 2.3%), June 2020 to 1.9% (vs 2.6%).
RBA: GDP seen 2.7% dec 2020, 3.1% June 2021, 3.0% Dec 2021, 2.9% june 2022.
RBA: Trimmed mean inflation seen 1.8% Dec 2020, 1.9% Dec 2021, 2,0% June 2022.
RBA: Unemployment seen 5.1% Dec 2020, 4.9% Dec 2021, 4.8% June 2022.
RBA: Wage growth seen 2.3% Dec 2020, 2.2% Dec 2021, 2.2% June 2022.
RBA: Forecasts based on the technical assumption of one 25 bps rate cut in mid-2020.

FX implications

 

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