The Reserve Bank of Australia’s (RBA's) forecasts were tweaked a little in the latest round, for the near term
Gross Domestic Product (GDP) for the year to June 2012 was cut from 4% in the November Statement to 3½% in the February edition. Further out, from December 2012 and onwards, GDP forecasts unchanged at 3-3½% out to mid-2013 and then 3½-4% out to the middle of 2014. The latter set of forecasts imply the economy is running right up against its speed limit of long run trend and probably a touch over.
The all important underlying inflation forecasts were cut by one quarter of 1% for the year to June 2012, underlying consumer price index (CPI) now at 2¼% and headline CPI at 1¾%, so very low. Looking ahead out to the end of 2013, inflation comfortably in the target band, running at 2½% ex the carbon tax, but then rising to the top of the target band 2¼-3%, by the end of the forecast period in June 2014.
The tone of the RBA commentary is generally positive about the outlook:
“...there has been a general improvement in sentiment over the past month, following further measures by the European Central Bank and European Governments”
“... the US economy has improved over recent months”
“...China has moderated, as intended”
“...the Australian economy continues to record moderate growth”
“.. Overall, the underlying inflation (excluding the effect of the carbon price) is forecast to remain within the target range over the next few years”.
There are risks to both sides of this good inflation outlook. The RBA says the downside biggest risk is from a disorderly sovereign debt default in Europe, triggering a severe recession. On the upside, the RBA says that inflation has been helped by the appreciation of the Aussie dollar, whereas non-tradeables inflation has been at a higher rate than is consistent with inflation at the middle of the target range. If the currency does not keep appreciating, this means the local economy will need to reduce cost pressures, including through higher productivity.
The RBA’s forecasts are very similar to ours over 2012 so their release is consistent with our recent call on the cash rate: the possibility of one more cut in May. Lower rates in May will require a significantly softer labour market (unemployment to 5½%), a surprisingly low CPI for the March quarter (due late April); and/or tighter monetary conditions via the banks deciding to raise borrowing rates because of higher funding costs and or a higher Australian dollar, not supported by rising commodity prices.
It is clear that RBA policy makers are as comfortable as central bankers can be at this point. There is room to ease if needs be but there is no clear intent to do so. Inflation is on target out to the horizon, with the economy cruising around the speed limit. Not a bad place to be.