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RBA lowers GDP, inflation forecasts – 7 August 2019

Australian Financial Review

The Reserve Bank of Australia has slightly trimmed its economic growth forecast and admitted inflation will undershoot for years after holding interest rates steady at a record low 1 per cent.

The decision by the RBA board on Tuesday to keep rates on hold follows consecutive interest rate reductions in June and July.

RBA governor Philip Lowe said further interest rate cuts were still possible and reiterated  rates would stay low for a lengthy period of time.

The central bank appears less confident that wages will pick up as intended, citing public sector wage caps and noting only that better wage growth would be a “welcome development” and dropping previous language that a “further gradual lift in wages growth is still expected”.

The RBA now forecasts the economy to grow about 2.5 per cent this year, downgraded from its May forecast of 2.75 per cent.

The bank retained its 2.75 per cent GDP growth forecast for 2020, ahead of the full release of its latest economic forecasts this Friday in the quarterly statement on monetary policy and Dr Lowe’s appearance at a parliamentary hearing in Canberra.

Dr Lowe signalled any change in interest rates would depend on the movement in the current 5.2 per cent unemployment rate and if inflation headed back up towards the bank’s 2-3 per cent target.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target,” Dr Lowe said in a post-meeting statement.

“The board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The inflation outlook was also downgraded and the bank said inflation remained subdued at 1.6 per cent over the year to June 30.

The RBA now expects it to take more than a year longer than previously thought for inflation to hit 2 per cent, admitting inflation would still be a little under 2 per cent this year and during 2020, before belatedly exceeding 2 per cent in 2021.

Commonwealth Bank of Australia chief economist Michael Blythe said he expected the RBA to cut the cash rate to 0.75 per cent in November to try to push down the jobless rate towards 4.5 per cent.

“The wages story looks to have morphed from a projection to a hope,” Mr Blythe said.

“The bank notes that a lift in wages growth would be ‘a welcome development’.”

AMP Capital chief economist Shane Oliver said the RBA was in “wait and see mode” to assess the boost to economic growth from the dual interest rate cuts and the Morrison government’s income tax cuts.

“The stimulus to date won’t be enough to get wages growth up and inflation back to target and so we expect the RBA to resume cutting rates later this year with 0.25 per cent cuts in each of November and February,” Dr Oliver said.

More broadly on wages, the RBA said: “Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country.”

Reflecting skittish sentiment on the US-China trade war, the Australian 10-year government bond rates dipped below 1 per cent for the first time on record – below the RBA overnight cash rate.

Dr Lowe noted that the outlook for the global economy remains reasonable.

“However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside,” he said.

 

Article appeared in The Australian Financial Review on 7 August 2019.

Article written by John Kehoe.

 

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