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David Plank, head of Australian economics at ANZ, points out that the RBA Board kept the cash rate unchanged at its May meeting despite the downward revisions to it’s assessment of growth and inflation and Contrary to ANZ’s expectation.

Key Quotes

“Likely key to this is the fact the RBA is forecasting inflation to reach 2% by the end of 2020 (previously 2 ¼%) and be “a little higher after that.”

“The anticipated rise in inflation to 2% comes despite no change in the unemployment rate “over the next year or so” that seems to contradict the Board’s judgment in the final paragraph “that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target.” We’ll have to wait for the details in Friday’s Statement of Monetary Policy (SoMP) to see what generates this rise in core inflation (from its current level of 1.6% if we consider the trimmed mean).”

“As things stand there seems to be an inconsistency between the inflation and labour market forecasts. We’ll be looking to the SoMP, the RBA Minutes and, most importantly,  a speech by the Governor on 21 May  to get clarification of the RBA’s thinking about the outlook and its mandate in a world where inflation continues to disappoint.”

“In our view there is very little likelihood of a return to 2% inflation without a faster decline in unemployment than the RBA currently forecasts. Certainly this is our interpretation of the recent inflation data. While we aren’t particularly bearish on the labour market, we think it will take more monetary stimulus to deliver a lower unemployment rate. Hence we continue to expect the RBA to cut at some point over the next 3 months, but with our call on the precise timing dependent on both the data and more information from the RBA.”