RBA expects inflation to accelerate to 2 pct – 3 pct by mid-2019, revises down near term GDP growth forecast

The Reserve Bank of Australia’s Monetary Policy Statement (SoMP) showed that the central bank expects underlying inflation to move into the middle of the target band by the end of the forecast period. This suggests that the RMB would be firmly on hold. The increasing profile for underlying inflation is considerable.

The new projection profile for underlying inflation indicates that inflation would run between 1.5 percent and 2.5 percent until the end of 2018, following which it would accelerate to 2 percent to 3 percent by mid-2019. This forecast is still a strong two years away and implies that the central bank is more confident that inflation would accelerate eventually, noted ANZ in a research report.

The central bank mentioned in its statement that the factors that have been exerting downward pressure on inflation, such as the declining terms of trade and the drop in mining employment, are dispersing. The RBA also stated that proofs from liaison and surveys with companies imply that growth of wage is not expected to ease further.

The central bank revised down near term economic growth considerably. The downward revision to the near term growth projections reflects base effects from the temporary softness in the third quarter growth, whereas the small revisions to the further out projections to 2.75 percent – 3.75 percent, rather than the earlier 3 percent – 4 percent, appears to be an achievable estimate, stated ANZ.

The central bank stated that it revised up its projection for trading partner growth and the terms of trade, but cut its estimates for employment growth and consumer spending. The Reserve Bank of Australia projects the jobless rate at 5 percent to 6 percent over the forecast horizon. Also, the central bank appears to be accepting the AUD level.

“We continue to see the cash rate on hold at 1.5%”, added ANZ.

At 5:00 GMT the FxWirePro's Hourly Strength Index of Australian Dollar was neutral at 18.3541, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 40.5737. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex