In today's decision statement, Governor Philip Lowe started by acknowledging that the global trade tensions that are rattling markets at the moment had "increased uncertainty" and meant that the risks for the global economy "remain tilted to the downside". Against that negativity, labour market conditions abroad are strong referencing low unemployment rates and rising wages growth, though notably "inflation remains low". Due to concerns around the global economic outlook and low inflation, the governor highlighted the recent easing in policy from other central banks and noted that "further monetary easing is widely expected". In recent appearances, Governor Lowe has stated that exchange rate depreciation is the primary mechanism by which the recent rate cuts are expected to support the Australian economy.
Focusing domestically, the governor conceded that economic growth through the first half of 2019 was lower than had been anticipated, due to slowing growth in household consumption in response to low income growth and declining property prices. Ahead of this Friday's quarterly Statement on Monetary Policy, the governor stated that the Bank's GDP growth forecast for 2019 would be lowered from 2.75% to 2.5%, though it still expected it to return to a trend pace of 2.75% in 2020 supported by its cuts to the cash rate, tax cuts, infrastructure investment, a stabilisation in the housing market and a more optimistic resources sector.
Despite the recent lift in the unemployment rate to 5.2%, the Bank will continue to forecast a decline over the next couple of years to 5.0%. Spare capacity remains persistent highlighted in today's statement by the line that "wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply".
Turning to inflation, the governor noted that Q2's Consumer Price Index data (see here) were broadly in line with what the Bank had expected and confirmed that "inflation pressures remain subdued across much of the economy". However, the Bank will downgrade its inflation forecasts from those it published in May, which had inflation rising to the 2% lower band by mid-2020. It now expects both headline and underlying inflation "to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021".
In concluding, the governor stated very clearly that policy will be lower for longer to support its objectives in reducing spare capacity in the labour market and lifting inflation back to its 2-3% target range. Given that the Bank's updated forecasts on Friday will show some deterioration in growth and inflation relative to what was anticipated in May's quarterly statement, an easing bias was made explicit with the closing line that "The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time" (our emphasis).