[CommSec Research]RBA slashes GDP forecast but still signals modest rate hike

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RBA slashes GDP forecast but still signals modest rate hikes ahead

RBA Statement on Monetary Policy

• The Reserve Bank has signalled that rates are likely to rise in the future. “The central outlook sketched above suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2–3 per cent medium-term target.
• Importantly though, the RBA is not signalling an imminent move in rates or flagging significant rate hikes ahead. RBA forecasts assume “an increase in the cash rate of ¼ percentage point by early 2012 and a further ¼ percentage point increase by mid 2013, a slower rise than suggested by the forecasts of market economists”.
• As we highlighted earlier in the week, the RBA has slashed near-term economic growth forecasts. Annual GDP growth in June 2011 has been cut from 3.25 per cent to 2.5 per cent. Underlying inflation is tipped at 2.5 per cent in June, up from 2.25 per cent.

What does it all mean?

• The Reserve Bank couldn’t have been any clearer. If rates are going to move anywhere, it will be up, not down. But it is by no means signalling that future rate hikes are either imminent or significant. RBA forecasts continue to be worked on market pricing of just a 25 basis point increase in the next year. On this basis, economic growth in a year’s time will be slightly slower than assumed back in February while underlying inflation is still expected around 3 per cent.
• Importantly, the Reserve Bank has slashed near-term growth forecasts, reinforcing expectations that a rate hike is not imminent. GDP growth in June had been tipped at 3.25 per cent, now it is assumed to be 2.50 per cent.
• The Reserve Bank assumes that the economy contracted in the March quarter. Clearly it would be difficult for the RBA to lift rates in June, just under a week after data shows our economy going backwards.
• CommSec is still pencilling in a rate hike in August, but the economy will need to recover significantly from the current flat spot for the RBA to take out another batch of inflation insurance.
• The latest RBA forecasts are tabled below.