RBA Downgrades Annual Inflation Forecast

Australian dollar feels the heat

The central bank confirmed it has downgraded its 2018 inflation forecast, after flagging the change in Tuesday's rates decision. Headline and underlying inflation are then expected to increase gradually to 2.25 percent by mid 2020, which was unchanged from the May Statement. The indication of reaching an unemployment rate of 5.0% is important as it provides an explicit expectation by the RBA that the economy will approach full employment.

The RBA also expects growth in the nation's $1.8 trillion economy is expected to accelerate to 3.25 per cent - this year and next year - before easing back to 3 per cent in 2020.

The Reserve Bank has officially downgraded its 2018 inflation forecast, expecting core and underlying inflation to climb 1.75% by December - down from 2.25% and 2% [respectively] projected in May.

Inflation has consistently undershot the RBA's target since early 2015 and was the single biggest reason the central bank cut interest rates to record lows in August 2016.

The central bank slightly bumped up its forecasts for GDP growth in Q2 2018, to 3% from 2.75%.

"The Reserve Bank Board has for some time been of the view that holding the cash rate steady at 1.50 percent would support the gradual progress being made on unemployment and inflation, with steady monetary policy promoting stability and confidence", Governor Philip Lowe said.

However income growth remains below its 20-year average of about six per cent and the resulting flatline in consumer spending growth - a key economic driver - remains a source of uncertainty for the economy, the bank said.

More news: Butlin's guest records targeted by hackers

Most noticeably, the changes in today's SoMP is the RBA's inflation projections.

Concerning longer-term projection, underlying inflation is expected to climb, before to return to the bottom end of the RBA's 2-3% target by 2020.

"Given the gradual nature of the improvement ... the board does not see a strong case to adjust the cash rate in the near term."

Attention will now turn to Wednesday's quarterly wage price index for clues as to whether wage growth has now "troughed".

The economy is not expected to encounter broad-based capacity constraints for some time.

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