The Reserve Bank has made only subtle changes to its forecasts on inflation and no change to forecasts on economic growth.
Reserve Bank general views haven’t become more negative or more positive. And there is no clear intention for rates to be cut again. The 15 key take-aways from the Reserve Bank report:
- There is no change to the outlook for the global economy. It is tipped to grow a little below trend this year before accelerating in 2014. Risks are balanced.
- In Australia, inflation is under control. Underlying inflation was a “bit lower than expected” in the March quarter. Underlying inflation could be a bit lower than previous expected in the near term before returning to the middle of the 2-3 per cent target band.
- If there was a worry about inflation it is that non-tradables inflation is a bit above average. But the RBA expects “domestically generated inflation pressures will remain contained.”
- The unemployment rate may drift a little higher.
- The Australian economy will grow a bit below trend in 2013, that is, 2.5 per cent rather than 3 per cent. But growth will return to trend or average rates in 2014.
- The RBA says that “growth in economic activity may have picked up slightly in the March quarter.”
- The main uncertainty is the ‘baton’ pass. That is, will the non-mining sector pick up steam to cover for the slowdown in mining?
- The RBA has revised up its forecast for consumption spending and expects the recovery in home building to continue. “Bank’s liaison suggests that retail sales rose further in April.”
- Productivity growth is strong; in fact “growth over 2012 was well above its average of the past 20 years.”
- Wage pressures are contained.
- The average housing loan rate will be around 2009 lows when recent announced rate changes take place.
- Bank funding costs haven’t changed since early February.
- Household wealth probably rose by 3 per cent in the March quarter after a 1.5 per cent lift in the December quarter.
- The Aussie dollar remains high, “notwithstanding the decline in export prices and interest rates”
- The Reserve Bank is keeping an open mind about whether the speed limit of growth has come down: “there may be less spare labour than otherwise” because of changes in determinants of labour supply.
Concluding paragraph from assessment
“Over the earlier part of this year, the Board held the cash rate steady while carefully assessing economic developments and noting that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At its May meeting, with inflation a little lower than had been expected, and growth of economic activity likely to remain below trend into next year, the Board judged that a further reduction in the cash rate would help to support sustainable growth in the economy, and would be consistent with achieving the inflation target. The Board will adjust the cash rate as appropriate to foster sustainable growth and low inflation.”
What is the importance of the economic data?
The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial is assessing the short-term outlook for interest rates.
What does it all mean?
- Why did the Reserve Bank cut rates on Tuesday? Most observers would note that there was little change in the wording of Tuesday’s statement from the previous month. And indeed there is nothing in the latest quarterly statement suggesting that the Reserve Bank has become gloomier or more positive.
- Inflation was a bit lower in the March quarter, but not dramatically so. The Reserve Bank hasn’t stepped up its rhetoric about the high Aussie dollar. And the Reserve Bank hasn’t downgraded its view on the economic outlook. In part the Reserve Bank probably cut rates because other central banks were doing the same. In other words there is concerted action by all central banks to take a few more chances in boosting growth: to do whatever it takes.
- The Reserve Bank could cut rates again. That was its language on Tuesday so it is right to factor in another rate cut. But it may not be necessary. That is, the rate cuts around the globe may work. Certainly the US labour market continues to improve.
- And the Federal Reserve may give other central banks a leg up by taking the foot off the stimulus pedal and allow the US dollar to appreciate. That would assist non-US businesses across the globe. The US dollar has lifted against major currencies in the past day. A deal perhaps? Major countries stimulate their economies in exchange for a firmer greenback? We will have to wait and see.