Reserve Bank of Australia, RBA, forecast inflation to slowly grow over time and the economy to rise at a solid pace as the slog on growth from the end of the mining investment boom has reduced.
On Friday, the Reserve Bank released a quarterly Statement on Monetary Policy, projecting that inflation will grow slightly to 2.25 percent in the year ending December 2018 from a projected 2 percent in the year to December 2017.
Inflation was forecast to stay at 2.25 percent until the year ending December 2019.
The bank had estimated 1.5 to 2.5 percent inflation in August for December 2017 and 1.75 to 2.75 percent inflation for December 2018. The underlying inflation, however, was projected to meet only 2 percent by December 2019.
According to Bill Evans, an economist at Westpac, the choice to lower the projections to below the bottom of the band in 2018 and at the bottom of the band in 2019 has important policy implications.
“We are now assessing a central bank, which is expecting that it will undershoot its core inflation target for another year and that even one year out, inflation will still be at the bottom of the target zone,” Evans said.
“Recall that in May 2016, when the bank was forced to lower its underlying inflation forecast to 1.5%, it immediately cut rated by 0.25%.”
“It is uncomfortable for a central bank to be consistently undershooting its target, and it would be surprising if it felt the need to tighten policy at a time when inflation is below its target.”
“We are not changing our views that rates will remain on hold in 2018 and 2019, but we have always been uncomfortable that the central bank’s forecasts were implying that it was expecting that it would be raising rates in 2018. These forecasts no longer portray a central bank that expects to raise rates.”
The forecast for the Australian economy was slightly changed from three months ago. The bank forecast growth to average about 3 percent over the next couple of years.
GDP was projected to rise 2.5 percent for the year ending December 2017 before developing to 3.25 percent in December 2018.
Labor market conditions have bolstered significantly in recent months and forward-looking indicators show that above-average employment growth to pursue in coming quarters.
The jobless rate was anticipated to remain unmoved at 5.5 percent until the year ending December 2018, before declining to 5.25 percent in December 2019. Even though the unemployment rate has fallen and was believed to decline further, some extra capacity was likely to remain in the labor market in the period ahead, the bank said.
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