RBA likely to stand pat, may revise down near term growth forecast

The Reserve Bank of Australia is expected to stand pat during its meeting tomorrow, noted Societe Generale in a research report. Given that the severe deceleration in the third quarter will have called for major revisions for the near term, the central bank’s board is likely to discuss the growth outlook. But there would be no change in the policy rate given a rebound in more recent, higher-frequency growth indicators and the evolution of commodity prices, inflation and the exchange rate.

During the RBA’s previous meeting, the board had noted that the economic growth in the third quarter was expected to be below forecast at the time of the November monetary policy statement. But the extent of the third quarter slowdown is expected to have been quite surprising for the central bank.

The RBA had projected the economic growth to decelerate to about 2.8 percent to 2.9 percent in the third quarter from the second quarter’s growth of 3.3 percent year-on-year. But the economic growth actually slowed to 1.8 percent year-on-year from the revised 3.1 percent, as GDP shrank by 0.5 percent quarter-on-quarter. This will definitely call for a significant downward revision to the central bank’s growth projections for the near term at least.

Even if the economic growth is expected to have recovered strongly in the last quarter of 2016, it is unlikely that the Reserve Bank of Australia will continue to keep the near-term GDP forecast it made in November, stated Societe Generale. The RBA is expected to cut the forecast by 1 percentage points.

“Similarly, the mid-2017 forecast is also likely to be revised down, from 2½ - 3½ percent yoy (in the RBA’s fan chart, this was previously at c.2¾ percent) to at best 2–3 percent and more likely to 1½ - 2½ percent (our forecast is 2.0 percent yoy)”, added Societe Generale

But the central bank is anticipated to come to the conclusion that the weak spot in the economic growth was an anomaly and that the underlying momentum in the economy is intact. If it comes to this conclusion, it might be reflected in an upward revision to the year-end 2017 GDP projection from 2.5 percent – 3 percent to 3 percent – 4 percent.

The main reason for the weakness in the third quarter economic growth was that certain sectors of the economy saw out-of-trend weakness, such as net exports, residential construction and public investment and consumption, which of all are likely to recover.