RBA statement suggests longer pause

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In its quarterly monetary policy statement, released on Friday, the RBA presented forecasts for economic growth and inflation that were almost identical to the scenario detailed in the previous statement in early May.

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Underlying inflation, currently at 2.7 per cent by both the RBA’s favoured measures, is forecast to stay at 2.75 per cent through to the end of 2011 before edging up to three per cent in 2012.

Annual growth in real gross domestic product (GDP), last recorded at 2.7 per cent over the year to March, is forecast to pick up to four per cent through 2012.

Aside from some minor changes to the quarterly profile, the numbers are virtually unchanged from three months earlier.

And this is significant because, in the minutes of its July 6 board meeting, the RBA highlighted two imminent pieces up news as crucial to its decision-making on interest rates.

One was the stress testing of European banks, which subsequently showed the great majority were on a sound footing, and the other was the June quarter inflation data, which last week confirmed underlying inflation was right in line with the May forecasts.

“The important question for the Board at its next meeting (August 3) would be whether the new information materially changed the medium term outlook for inflation,” the RBA said in the minutes of the July 6 meeting.

The forecasts in Friday’s statement show that the outlook has not materially changed – in fact it is virtually identical.

That was what led the RBA’s board to leave the cash rate at 4.5 per cent, its third consecutive decision to leave policy on hold after a rapid-fire series of rate hikes had brought it up from 3.0 per cent at the beginning of October to 4.5 per cent at the board’s May meeting.

But the risks for interest rates are still tilted to the upside.

This is the inescapable implication of the forecast that underlying inflation will be at or near the top of the RBA’s two to three per cent target range until at least the end of 2012, meaning more chance of a deviation above the target range than below given symmetrical risks around the central forecasts.

And the RBA made it clear the risks are evenly distributed around the forecasts.

“As always, there are risks in both directions around the forecast, although overall, these risks are viewed as evenly balanced,” the RBA said in its statement on Friday.

On the upside for growth and inflation, the RBA noted risks that the global economy might not moderate as expected over the next year or so, and that local mining companies might ramp up their investment more than anticipated, putting pressure on the economy’s productive capacity.

On the downside, the RBA said there is a risk that private sector demand might not accelerate as quickly as expected as public sector stimulus continues to taper off, and that measures by Chinese authorities to cool their economy might prove overly effective.

And while these risks are balanced, the symmetry applies to the forecast horizon, out to the end of 2012.

But with GDP growth expected to hit four per cent by that point, well above the long-term average of about 3.25 per cent, it is reasonable to expect that the RBA will be concerned about a build-up in inflationary pressures and a show a growing propensity to hike the cash rate as time goes by.

In its commentary, the RBA said it expected “some tightening of capacity” in the economy, while the labour market is expected “to tighten gradually over the period ahead”.

Based on such an outlook, it seems improbable that the RBA would not be expecting to have to jack rates up at some stage, although there is nothing in the statement to indicate that such a move is imminent.