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Australia & New Zealand Weekly: RBA Lowers Inflation Forecasts to Reflect “One-off” Effects

Week beginning 13 August 2018

  • RBA lowers inflation forecasts to reflect “one-off” effects.
  • RBA: RBA Governor Lowe Semiannual Testimony, Assistant Governor Ellis speaks.
  • Australia: Westpac-MI Consumer Sentiment, wage price index, employment, NAB business survey.
  • NZ: REINZ house prices and sales.
  • China: retail sales, fixed asset investment, industrial production.
  • US: retail sales.
  • Key economic & financial forecasts.

Information contained in this report current as at 10 August 2018.

RBA lowers inflation forecasts to reflect “one-off” effects

The Reserve Bank’s August Statement on Monetary Policy provides few surprises.

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Of most interest in the Statement is the update in the Bank’s forecasts. In particular, this update includes another six months of forecasts to cover the whole of 2020.

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. The forecast slowdown between 2019 and 2020 is attributed to a flat contribution from LNG exports as production capacity peaks in 2019.

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.

The Bank attributes this revision to changes in the September quarter, specifically for electricity, childcare costs and some education costs. They are claimed to be one-off and do not affect any subsequent quarters. Consequently, the forecasts for the year ending December 2019 are unchanged at 2 ¼ per cent (headline) and 2 per cent (underlying). The modest forecast lift in underlying inflation to 2 ¼ per cent to June 2020 which we saw in the May statement is extended to December 2020, with both headline and underlying forecast at 2 ¼ per cent.

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. Consumer spending continues to be a source of “significant uncertainty” largely because of the outlook for household income growth. Key components here are wages growth and employment gr