RBA SoMP: Little change to outlook - ANZ

David Plank, Head of Australian Economics at ANZ, notes that the RBA’s forecasts for inflation were unchanged as this was expected at the core level but is a surprise for headline and the Bank’s commentary on headline inflation is not consistent with the absence of change in the forecast table.

Key Quotes

“There was a modest upward revision to GDP growth in the year to June 2018.”

“The Bank has revised down its forecast pick up in wage growth somewhat, but doesn’t expect to see a further slowing. The Wage Price Index released on 17 May is the next test of this view.”

“We continue to see the cash rate on hold at 1.5% for an extended period.”

“Details

• The lack of change to the RBA’s headline inflation forecasts is a surprise to us. The point estimate for the year to June 2017 looks too low, for instance. Interestingly, the Bank’s forecasts for headline inflation don’t seem to line up with its commentary with the Bank explicitly stating that “headline inflation …is now expected to be between 2 and 3 per cent throughout the forecast period.” The headline inflation numbers in its forecast table say otherwise.
• The key for policy, though, is that “the expected increase in underlying inflation…is still quite gradual because a number of forces are continuing to hold inflation down. In particular, wage growth is low.” Indeed, while wage growth is expected to pick up gradually, it is “at a slightly slower pace than had been forecast in February.” A further slowing in wages would be a surprise, however. In addition the Bank thinks that some of the competitive pressures weighing on core inflation, notably retail, are increasing.
• While the GDP forecasts have not changed materially, the RBA has “more assurance about the domestic outlook.” The Bank has taken comfort from the rebound in growth in Q4 and the “recent run of both domestic and international data.” One area of uncertainty is consumption growth. The Bank thinks “consumption growth might have eased again in the March quarter, but the expectation is that consumption growth will broadly track income growth in the period ahead.”
• The outlook for non-mining business investment is also uncertain and “some forward-looking indicators suggest non-mining business investment is unlikely to pick up substantially in the near term.” We think the outlook for non-mining business investment is more positive, noting that it grew at a double digit rate in the year to December.
• “The Board has continued to monitor the risks posed to household balance sheets given the context of high and rising household debt.” This is in line with the comments made by the Governor in a speech on 4 May. The Bank expects the measures taken by APRA and higher interest rates “are likely to lead to some slowing in housing credit growth.”
• The recent decline in commodity prices does not pose a downside risk to the outlook. In fact, a further decline is anticipated and “if commodity prices do not fall as far as currently anticipated, the [positive] impact on growth and employment could be greater than currently assumed.”