RBA SoMP: Few surprises - Westpac

Bill Evans, Research Analyst at Westpac, notes that the Reserve Bank’s August Statement on Monetary Policy provides few surprises, but technical assumptions around the AUD and interest rates are somewhat different in August than in May.

Key Quotes

“The AUD trade-weighted index (TWI) is assumed at 64 in August compared to 62 in May. The interest rate assumption in May was for a rate hike by mid-2019 whereas the assumed rate hike is now delayed until the end of 2019. The oil price is estimated at 73 USD per barrel compared to 71 USD in May.”

“The GDP growth rate forecasts through to end 2018 and end 2019 are unchanged from the May Statement at 3 ¼ per cent, while the 3 per cent forecast for growth through to June 2020 is extended to December 2020.”

“Growth to June 2018 is forecast at 3 per cent compared to 2 ¾ per cent in May. This forecast implies that the Bank is expecting the GDP print for the June quarter to be an optimistic 1.0%, following the 1.0% which was registered for the March quarter. In contrast, Westpac is expecting 0.6% for the June quarter growth rate.”

“The significant change from May comes with the inflation forecasts. Headline inflation to December 2018 has been revised down from 2 ¼ per cent to 1 ¾ per cent. Underlying inflation to December 2018 has been revised down from 2 per cent to 1 ¾ per cent.”

“If those forecasts prove correct, then 2018 will be the fifth consecutive calendar year in which headline inflation has printed below the bottom of the 2-3% target band and the third consecutive year when underlying inflation has been the below the bottom of the band.”

“There are no changes to the unemployment profile with the rate expected to be 5 ½ per cent in December 2018, 5 ¼ per cent in December 2019 and a projected fall from 5 ¼ per cent in June 2020 to 5 per cent in December 2020.”

“Commentary in the Statement around the growth and inflation outlook is largely unchanged from May.”

“Conclusion

• The Bank’s approach, consistent with the May Statement, and many preceding statements, is to anticipate a gradual return to “normal conditions”. The spectre of the persistent underperformance of inflation over multiple years must be unnerving. Nevertheless this gradual return to normality remains the theme.
• From our perspective weak wages growth; a slowdown in employment growth; and potential negative wealth effects loom as more significant risks to these forecasts than the Bank appears to be prepared to accept at least in the Statement.
• Westpac expects growth in the key policy year of 2019 to be only 2.5% compared to the 3 ¼ per cent anticipated by the RBA. We see larger risks around the household sector; negative wealth effects from the housing market; and share the RBA’s unease around the outlook for risks in China.
• There is a clear sense that there is no particular urgency to change the policy stance and a forecast of 2 ¼ per cent underlying inflation and 5 per cent unemployment in 2020 certainly confirms that view.
• We see no reason based on the Statement and the forecasts to change our view that the cash rate will remain on hold through the remainder of 2018 and 2019.”