RBA: Optimistic, supports call for next move in the cash rate to be up - TDS

The RBA remains generally upbeat on the domestic and global economic outlook, yet the Bank took the opportunity to downgrade its near term GDP forecasts, explains the analysis team at TDS.

Key Quotes

“GDP was revised down by roughly 0.50% for Dec’17 (from 3% to 2.5%) and by 0.25% for Jun’18 (from 3.25% to 3%).”

“There is no clear driver for the near term cuts in GDP. Outside of a near term hit from cyclone Debbie, we surmise that softer dwelling investment and a higher AUD may have played some part.”

“That said the Bank did lift its 2019 GDP forecast from 2.75%-3.75% to a 3-4% range, suggesting the Bank is more confident now on the medium term growth outlook.”

“While the Bank has been trying to talk down the AUD most recently, the AUD at US$0.80 has not led to downward revisions to the inflation profile. In fact the CPI profile was lifted.”

“Supporting the firmer inflation outlook is a further decline in the unemployment rate with the Bank projecting firm employment conditions as likely to persist. This positive outlook should be supportive for consumption going ahead.”

“So even though the RBA cut near term GDP forecasts, the lift in the Bank’s medium term growth forecast and higher inflation profile suggest the next move in the RBA cash rate is likely to be up, not down.”

“Rates markets are little changed following the SoMP release, with the OIS strip pricing in less than a 50% chance to a RBA hike by May next year. The AUD dropped to a low near US$0.7935 on news of a short term hit to GDP, but has since recovered to session highs around US$0.7970.”

“TD’s forecast for a 25bp hike in May 2018 requires not only a decline in the unemployment rate and the underemployment rate, but for full-time hours worked to drive employment and wages growth.”