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The Reserve Bank of Australia (RBA) will likely leave the benchmark cash rate at 1.5 percent over the coming quarters in order to support domestic demand. A cautious monetary tightening phase will likely commence in the second half of 2018.
The RBA will carefully monitor developments in the labour and property markets; employment metrics continue to show mixed signals while the real estate market remains heated in certain Australian cities, particularly in Sydney and Melbourne.
The headline inflation rate climbed to 2.1 percent y/y in the first quarter from 1.5% at end-2016, pushing inflation into the RBA’s 2-3 percent target range. Nevertheless, the acceleration was not a result of strong demand-driven price pressures but reflected the base effect stemming from very low commodity prices a year ago.
"We assess that slack in the Australian labour market will continue to keep wage increases and core inflation low. Accordingly, we forecast that headline inflation will close the year at 2.0 percent y/y," Scotiabank commented in its latest research note.
