RBA remains confident, lowers growth and inflation forecasts - Westpac

Bill Evans, chief economist at Westpac, notes that the RBA has lowered their growth forecasts but they remain above that of Westpac, while it decided to leave the cash rate unchanged at 1.5%.

Key Quotes

“The Governor chose to repeat the statement’s concluding paragraph which explains the policy decision with the same words that he used in December despite lower forecasts and recognition of downside risks.”

“For 2019, forecast growth has been revised down from 3 ¼ per cent to 3 per cent, and 2020, from 3 per cent to “a little less” due to slower growth in exports of resources. It is important that this 3 per cent growth forecast is above the assessed trend rate of 2 ¾ per cent, and the implied 2020 forecast is likely to be around trend. If a central bank is forecasting above trend growth, then it is highly unlikely to adopt an easing bias, and indeed the chances are still likely that the Governor will persist with his assessment that even though rates are likely to remain steady for some time, the next move is likely to be up.”

“The inflation forecasts were also revised with the underlying inflation forecast for 2019 reduced from 2 ¼ per cent to 2 per cent, while the 2020 forecast remains at 2 ¼ per cent. Hence the Bank is maintaining the view that inflation will gradually move into the 2 to 3 per cent band, although it will take somewhat longer than previously expected.”

“With these revised forecasts, the RBA is clearly less comfortable with its previous positive outlook. Its growth forecasts remain significantly above Westpac’s own view. With our forecasts of 2.6% growth in 2019 and 2020, it still seems that the more likely outcome will be for steady rates, even if as we expect, the RBA will eventually have to adopt growth forecasts much closer to Westpac’s current view. Westpac confirms its long-held forecast that the RBA cash rate will remain on hold in 2019 and 2020.”