The RBA released the Statement on Monetary Policy (SMP) on the 9th August 2018.
The RBA is predicting GDP growth at a little above 3% in 2018 and 2019, and for the economy to remain on track for the unemployment rate to decline to around 5% and the inflation rate to rise over time.
For the past 7 years the RBA predicted that inflation will rise over the coming years but each year it has been wrong. Again, market commentary reflects that the risks to growth remain to the downside.
A barometer to the market’s expectation of the implied inflation rate is by looking at the differential between the 2030 Government Bond and the 2029 Government Indexed bond. Since Thursday’s release of the SMP, the inflation expectations have dipped to around 1.8% over the period.
That is a low expectation of inflation over 12 years, but a risk that the RBA doesn’t seem prepared to accept. The very accommodative monetary policy had the official cash rate fall to 1.5% in August 2016, so a full two years with what appears to be another two years of more of the same.
Low wages growth, low savings rate, high debt to income ratios, and the negative wealth effects of stabilized/falling home prices doesn’t seem to support an economy predicted to grow above 3%.
