RBA: Inflation to remain below target for longer - TDS

According to analysts at TDS, the RBA did not surprise them with its upbeat outlook for the global economy and on domestic employment, with above average employment growth expected to continue in today’s SoMP.

Key Quotes

“The RBA told us in its Statement on Tuesday that the growth outlook was little changed and this was reflected in today’s forecasts. Growth was revised lower by 0.25% in Jun’18 and Dec’19 and was left unchanged elsewhere. Annual GDP growth is expected to remain above 3% from mid Jun’18.”

“The RBA was tight lipped on the inflation trajectory in its Statement on Tuesday. Today the RBA revealed it has sliced 0.5% off its inflation profile from mid-next year, meaning the RBA expects underlying inflation to reach the bottom end of the 2-3% target band only in Jun’19.”

“The cuts in the underlying inflation profile take into account the reweighting of the CPI basket and substitution bias effect. The RBA had estimated earlier that core inflation would be ~0.25% lower as a result, but the RBA estimates this to be 0.4% now (as the substitution effect becomes larger with no change in weights for 5yrs). Hence the RBA cut its underlying inflation forecasts a little more than was initially suggested.”

“Nonetheless inflation is expected to edge higher slowly but much uncertainty remains on how quickly wages growth picks up. For now the Bank noted “wages growth has been slow, averaging an annual rate of around 2 per cent in recent quarters, but average earnings growth has been slower still.”

“The RBA acknowledged the slowdown in household consumption and weakness in retail spending, citing slow growth in incomes and high debt levels as constraining factors. The Bank made no mention of the Fair Work Commission increase in the national minimum that should be reflected in next week’s Wage Cost Index, but it expects wages to slowly increase over the horizon period given strong levels of business investment and above average employment growth over coming quarters to absorb spare capacity.”

“There was limited commentary on the AUD, with the Bank reiterating a further appreciation would result in a slower pick-up in output and employment.”

“Rates markets are little changed, 3yrs are 2bps lower in yield from pre SoMP levels and 10yrs –1.5bp. Jun’18 OIS and beyond is 1-2bps lower. May’18 hike probability is ~20%. The AUD is essentially unchanged around US$0.7680.”

“With inflation below target and the RBA not yet at full employment, the RBA can afford to keep rates on hold for sometime, unless household debt picks up again. With little appetite for the RBA to cut and add to financial stability concerns, 3yr ACGBs should pivot around 2% while offshore developments will drive moves in long end Australian bond yields.”