RBA to maintain hopeful forecasts, but risks continue to pile up – Westpac

According to analysts at Westpac, the Reserve Bank of Australia (RBA) is likely to maintain upwards-leaning inflation forecasts heading into the next few years, but downside risks continue to mount just beneath the surface.

Key highlights

The Statement on Monetary Policy will include an update of the  Bank’s forecasts out to December 2020.  Forecasts for GDP growth are likely to be unchanged from  the August Statement on Monetary Policy: 3.25% in 2018 and  2019; and 3% in 2020.

These forecasts indicate above potential  growth, which is generally accepted to be 2.75%.  Headline Inflation forecasts in August were 1.75% in 2018; 2.25% in  2019; and 2.25% in 2020.  With higher petrol prices than were expected in August, the RBA  may raise its forecast for headline inflation in 2018 from 1.75% to 2%.

Underlying forecasts for inflation were 1.75% in 2018; 2% in  2019; and 2.25% in 2020.  These forecasts are likely to be unchanged.  One aspect of the detail within the September quarter 2018 CPI  result that stood out was the sharp fall in the price pressures  associated with house building. This component, which has the  biggest weight in the CPI and consistently appears in the core  measures, slowed from 0.8% in the June quarter to 0.1% in the  September quarter.

Between March 2016 and December 2016  new lending to property investors lifted by 40% and house prices  in Sydney (up 11%) and Melbourne (up 7%) both boomed in the  last six months of 2016.  There will be no such recovery in 2018 or 2019. The RBA has made  a clear commitment to holding the cash rate at the current level  and bank lending policies continue to tighten and house prices in  Sydney and Melbourne are likely to fall through 2019.  As a comparison with 2016, we note that new lending to investors  has fallen by 27% over the last year and there is no sign of any  relief.