RBA SoMP: Growth and inflation forecasts cut

Bill Evans, analyst at Westpac, notes that the RBA has cut its forecasts for growth and inflation to barely acceptable levels despite assuming two rate cuts as per market pricing in its May Statement on Monetary Policy (SMP).

Key Quotes

“GDP growth (to one decimal point) is now forecast at 2.6% for 2019 and 2.7% for 2020. That compares with 3.0% and 2.7% in the February Statement on Monetary Policy. The main explanations for the growth reductions for 2019 are consumption (2% down from 2.5%) and dwelling investment (–6.7% down from –4.5%).”

“As revealed in the Governor’s decision statement following the May Board meeting, the underlying inflation forecasts (trimmed mean) have been reduced from 2.0% for 2019 in the February SMP to 1.75% in May and the 2020 forecast reduced from 2.25% to 2.0%.”

“The forecast for the unemployment rate has been slightly increased, with the 5% unemployment rate still expected to hold through 2019 but the fall to 4.75% pushed back from December 2020 to June 2021.”

“Today’s SMP emphasises that the RBA thinks it’s highly likely that it will need to follow market pricing with two rate cuts. Westpac concurs with the market’s August timing for the first cut but expects that the second cut will occur in November – well before the timing implied by market pricing of a full cut by May 2020.”

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