Thursday, 16 August, 2018

Low inflation means there's no case for 'near term' rate hikes: RBA

Australian dollar feels the heat The RBA has downgraded its inflation forecast for this year
Rhonda Young | 12 August, 2018, 20:15

The AUD/JPY is trading into 81.70 following the Reserve Bank of Australia's (RBA) Statement of Monetary Policy, which saw little new information for traders as the central bank remains firmly entrenched within its wait-and-see pattern, while the RBA hopes that a continued decline in the Aussie against the US Dollar will see some kind of economic revival for Australia by boosting exports.

The RBA now expects both core and underlying inflation to rise by 1.75% to December 2018, down from the May forecasts of 2.25% and 2% respectively.

Inflation has consistently undershot the RBA's target since early 2015 and was the major reason for the central bank cutting interest rates to the record low 1.5 per cent in August 2016 - where rates have been since then.

A drop in electricity prices across some Australian cities, coupled with reduced child care and other service prices are attributed for the near-term downgrade. The RBA maintained that the unemployment rate will stay around 5.25% through June 2020, before dropping to 5% in December.

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The RBA also expects growth in the nation's $1.8 trillion economy is expected to accelerate to 3.25 per cent - this year and next year - before easing back to 3 per cent in 2020.

"The language around the exchange rate was little changed, being within the "recent range of the past two years".

However, there were no changes to the longer-term projections. However, the forecasts for headline and underlying inflation in the September quarter have been revised down.

While Governor Lowe reitearted in his speech on Monday that the next move in rates is more likely to be up than down, data from ANZ last Friday showed market pricing for the next RBA rate hike has now been extended all the way to 2020.

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"Given the gradual nature of the improvement.the board does not see a strong case to adjust the cash rate in the near term".

Still, "the economy is not expected to encounter broad-based capacity constraints for some time", the RBA said, as labor force participation hovers at all-time highs.

Subdued wages growth, at around 2 per cent, is also adding downward pressure on consumer prices despite a solid run of jobs growth since 2017.

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