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AUSTRALIA ECONOMICS: Daiwa Says RBA Forecasts Reinforce Expectation of Unchanged Cash Rate Until 2024

· 02/05/2021 01:19

06:14 AM EST, 02/05/2021 (MT Newswires) -- Daiwa Capital Markets said that

Daiwa Capital Markets said that this week's extensive Reserve Bank of Australia (RBA) communication concluded overnight Thursday with the release of the quarterly Statement on Monetary Policy (SoMP) and the appearance of Governor Philip Lowe before the House of Representatives Standing Committee on Economics.

As one would hope, this communication was consistent with Tuesday's post-meeting statement and Lowe's subsequent speech on the economic outlook. In other words, it emphasized that despite further upside surprises to key activity indicators, the RBA considered that sustained monetary accommodation will be required until at least 2024 in order to achieve its full employment and inflation mandate, noted Daiwa.

As far as the SoMP was concerned, the main interest was in the detail of RBA's forecasts, pointed out the bank. Rounded to the nearest 0.5ppt, Australia's central bank now expected the economy to have contracted 2% y/y last year -- a sharp improvement on the 4.5 y/y decline forecasted in November and implying that the RBA expected Q4 gross domestic product (GDP) growth of around 2%-2.5% q/q (in Daiwa's view, a reasonable estimate).

RBA now forecasted GDP to grow 3.5% y/y this year (1ppt less than previously) and an unchanged 3.5% y/y in 2022. Given the outlook for activity, the unemployment rate was now expected to end this year at 6% and next year at 5.5% (in both cases down 0.75ppts from the November forecast).

RBA's estimate for the end of June 2023 -- the end of the forecast horizon -- was 5.25%, which would remain slightly above the pre-pandemic level that had generated insufficient wage growth to allow the RBA to achieve its inflation mandate.

Not surprisingly, as a consequence, RBA's forecast for trimmed mean inflation remained soft, with the forecast for the end of next year unchanged from the 1.5% y/y forecast in November and the forecast for June 2023 just slightly firmer at 1.75% y/y -- still outside of RBA's 2%-3% inflation target.

Given the central bank's commitment not to raise the cash rate until actual inflation was sustainably within the target range, these forecasts made clear why the RBA didn't expect to raise the cash rate until 2024 at the earliest, according to Daiwa. In addition, even the RBA's suggested upside scenario indicated that the unemployment rate would fall no lower than 4.75% by June 2023, so that wage growth would remain short of pre-pandemic levels and trimmed mean inflation slightly below 2% y/y.

This was but one possible scenario. However, it did illustrate that there will be no quick turnaround in RBA's dovish view, not least due to worries about imparting upside pressure on the exchange rate given ultra-accommodative monetary policy settings elsewhere.