RBA's more balanced risks around the inflation outlook: ANZ's Jo Masters

RBA's more balanced risks around the inflation outlook: ANZ's Jo Masters
RBA's more balanced risks around the inflation outlook: ANZ's Jo Masters

GUEST OBSERVER

The minutes from the November Board meeting were broadly consistent with the narrative from the recent Statement on Monetary Policy, as expected.

The RBA continues to monitor the risks around the labour market, housing market, China, and private consumption, and continues to think that the “appreciating exchange rate could complicate this adjustment”.

Importantly, the assessment of risks around the inflation outlook appears more balanced, with the minutes suggesting to us emerging confidence that the disinflationary pulse has peaked.

We continue to see the RBA on hold with the cash rate steady at 1.5% over our forecast horizon (to end 2018).

Governor Lowe is speaking later today (7:15pm AEDT) on ‘Buffers and Options’ at the annual CEDA dinner.

The minutes from the November RBA Board meeting were broadly consistent with the narrative from the recent Statement on Monetary Policy, as expected. The overall tone is quite positive, with economic growth forecast to be around potential in the coming quarters and then “a little above potential growth thereafter”.

The outlook is not without risks and the minutes again highlighted concerns around:

the medium-term risks to the outlook for China’s economic growth given high and rising debt levels (notwithstanding better near-term growth prospects) ;
and, as a result, uncertainty about the outlook for the terms of trade (which had been revised higher given the recent rise in prices);
excess capacity in the labour market and the impact on wages; uncertainty about “households’ expectations of their income growth” and how this impacts spending and saving decisions; and the housing market, where “members noted that assessing conditions in the housing market had become more complicated” and that “while overall conditions had eased relative to 2015, some indicators had strengthened over the previous few months”.
 
Importantly, the minutes suggest the RBA may be more comfortable with the inflation outlook and perhaps increasingly confident that disinflationary pressures have peaked. Indeed, the minutes repeated the assessment in the SoMP that the risks to global inflation are “more balanced” but also judged the risks to domestic inflation as “broadly balanced”, supported by “evidence that wage growth in Australia had stabilised”.

A stabilisation in wage growth is important for the outlook for inflation, particularly given already weak rental growth and the large volume of apartment supply coming on stream.

While the policy framework can accommodate periods of undershoot, rising confidence that inflation has stabilised – even if it is expected to rise only gradually – would be a welcome development.

We continue to see the RBA on hold with the cash rate steady at 1.5 percent. While the RBA’s forecasts for persistently low inflation implies an easing bias, this is tempered by a more balanced assessment of the inflation risks and ongoing financial stability concerns. 

Jo Masters is senior economist, ANZ and can be contacted here.

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