The Reserve Bank of Australia’s Statement on Monetary Policy (SoMP) for August was broadly in line with expectations, with gradual progress forecast for the domestic economy over the next couple of years.
The RBA’s latest forecasts contained a few minor changes to its near-term outlook; GDP growth for Q2 was lifted to +3.0%Y/Y from +2.75%, while inflation is anticipated to decline by year-end — as signaled in the Governor’s statement that accompanied Tuesday’s announcement to hold the Cash Rate at 1.5%.
GDP growth was a little stronger than the RBA had anticipated in Q1, and it is expected to remain above trend (around 2.75%) over the forecast period.
Growth in the March quarter was broad-based, and the RBA expects this to continue supported by non-mining business investment, public demand and an elevated pipeline of residential construction work. Resource exports — led by LNG — are also a growth driver, but this is forecast to fade by mid-2020. The outlook for household consumption remains highly uncertain and is dependent on the responsiveness of wages growth to a reduction in spare capacity in the labour market.
On this front, the RBA expects above-trend GDP growth to support a gradual reduction in spare capacity, due to employment growth tracking above growth in the working-age population. These dynamics, however, are anticipated to lift the participation rate — which is already at or near historic highs — a little further, as the positive conditions encourage more Australians to join the labour force or delay retirement. As a result, only gradual improvement is forecast in the unemployment rate — not declining to 5% (estimated to be around the level of full-employment) until December 2020.
A softer outlook for inflation is due to declines in ‘administered prices’ — areas which are influenced by government policy — over the 2nd quarter, particularly from electricity and gas, child-care subsidies, TAFE fees and car registration fees in NSW. These declines are expected as once-offs however, underlying inflation — the RBA’s preferred measure — is still expected to remain below the middle of the target (2.5%) over the forecast period.
Today's forecasts are based on the expectation that the Cash Rate moves broadly in line with market pricing, which currently points to no change through to at least the end of 2019.