Large downgrade to inflation strengthens likelihood for near-term RBA easing

RBA’s quarterly Statement of Monetary Policy (SoMP) underscored concerns over softer inflation outlook. Downward revisions to the Australian inflation and wage growth outlook raised doubts over the OZ nation’s economic growth prospects.

The Bank has cut its Dec-16 inflation forecasts by a full percentage point. Underlying inflation is now seen at 1-2 pct end 2016 (pvs 2-3 pct), 1.5-2.5 pct out to mid-2018 (pvs 2-3 pct). Inflation is set to miss its 2-3% target through the entire 2016 year. Outlook for wage growth was revised lower, and is expected to stay low for longer and then rise very gradually.

Elsewhere the Bank’s forecasts were largely unchanged. GDP growth in the near term was revised up as a result of the strong Q4 GDP print, but from Dec-16 onwards the numbers were unchanged. The unemployment rate forecasts were also broadly unchanged.

The Australian dollar remained relentlessly offered versus its American counterpart on the day after downward revisions to the Australian inflation and wage growth outlook. Such a large downgrade to inflation argues for a rapid shift down in the cash rate, and another cut in the near-term.

"We now expect another 25bp cut, most likely in August, but the possibility of a cut as early as June shouldn’t be discounted," said ANZ in a report.