RBA cuts economic forecasts, will miss inflation target
Generic shoppers in Brisbane’s Queen Street Mall. QueensPlaza crowds retail Christmas shopping economy National Bank NAB. Brisbane Times.The Reserve Bank has cut its forecasts for economic growth by 25 percentage points and said it’s on track to miss its inflation target for four years in a row.
The economy is now only set to grow by 3.25 per cent by 2019, according to its statement on monetary policy released on Friday, compared to a previous estimate of 3.5 per cent growth. At the same time, inflation does not look like it will rise above the RBA’s target of 2 per cent until the end of that year, the bank said.
The central bank said it was still not clear how much spare capacity there was in the labour market, which meant wage stagnation could stick around for some time, fuelling uncertainty over the forecasts.
“Both these factors affect the outlook for inflation and household income growth, which is a key driver of consumption and therefore the gross domestic product growth forecast,” the RBA said.
Household spending remains a key uncertainty – particularly after retail sales posted the weakest three-month stretch in seven years – as policy makers fret that highly indebted households struggling with record-low wage growth will be spooked out of spending.
The updated forecast also partly reflects changes to the items collected by the n Bureau of Statistics in its basket of goods used to gauge consumer price growth.
The basket was updated on Monday for the first time in six years after the bureau said it was overestimating inflation by not accurately calculating the cost of housing and utilities.
In its statement on Friday, the Reserve Bank estimated that underlying inflation in the three months to September of 1.8 per cent was actually 1.5 per cent.
Keeping the cost of living rising at between 2 and 3 per cent is a key target of the Reserve Bank to keep prices stable and to support the long-term growth of the economy. Inflation below 2 per cent suggests people are not spending as much as they should as a result of low wage growth.
Board members said they were more confident in their forecast that wage growth would start to turn around after a string of positive employment results has seen unemployment sink to its lowest level in four years.
The bank expects that trend to continue with its updated forecasts pencilling in a drop in the unemployment rate to 5.25 per cent, close to the so-called natural rate of unemployment.
The forecasts have pushed expectations of interest rate rises out to late 2019, which could end with nearly doubling its run for the longest time without a rate cut or rise at 33 months.
“The RBA’s lower inflation forecasts may prompt some calls for the bank to cut interest rates below 1.5 per cent. That seems extremely unlikely without a major deterioration in the economic outlook and a rebound in the unemployment rate from 5.5 per cent to well above 6 per cent,” said Paul Dales, chief economist at Capital Economics.
“With the housing market looking very fragile and household debt high and rising, now is not the time to turn a blind eye to low inflation and raise interest rates.”
The n dollar retreated after the statement was released but recovered the lost ground. At 4pm, the dollar was fetching around 76.79 US cents.