RBA throttles back their inflation view as US Congress brainstorms on tax - Westpac

Elliot Clarke, Research Analyst at Westpac, explains ha this week began with their understanding of Australia’s inflation story being ‘revised’ and ended with the RBA making a significant adjustment to their forecasts.

Key Quotes

“In between, we saw progress on tax reform in the US; although on this front, developments to date are best regarded as a work in progress.”

“Firstly on the CPI, we have released a number of pieces this week that have detailed both the quantitative and qualitative effect of the ABS’ reweighting of the CPI basket. The take home point is that, incorporating the changed weights, we struggle to see a peak in headline inflation any higher than 2.0%yr for the foreseeable future. Key to this outlook is ongoing competition amongst retailers as well as the impact greater housing supply is having on rents.”

“The other big event in Australia this week was the RBA’s November meeting and the release of the November Statement on Monetary Policy. The monthly meeting came and went with little fanfare, but the November Statement received considerable attention.”

“The change that particularly caught our eye was the significant downward revision to their CPI forecasts. Inflation is now not expected to get back to the bottom of the target band (2%) until 2019.”

“As our Chief Economist Bill Evans explains, this cannot solely be put down to the CPI reweighting (highlighted above) and comes despite expectations of above-trend growth from 2018 on.”

“Bill’s conclusion on the Statement is worth quoting in full.

“This is a significant set of forecast revisions we believe signals a changed policy outlook from the Bank itself. While the Governor will continue to indicate that the next move in rates will be up, we think that the rhetoric around a long period of steady rates will gain further emphasis.

Forecasting another year of inflation undershooting the target zone might, in other circumstances signal a central bank which is contemplating further rate cuts. However, it still believes that growth will lift to above trend, and the experience of 2016, when two rate cuts triggered another surge in house prices, will temper any inclination to cut again”.”

“We retain our view that growth will disappoint in 2018 and 2019 owing to declining residential investment and cautious households and businesses. This will see the RBA remain on hold through both years.” 

“Outside of Australia and New Zealand, the most significant development this week has been continuing progress on US tax reform in both the House and Senate. The issue is, that rather than work together, the two halves of Congress have each formed their own plan which, while based on the same ‘principles’, are actually quite different.”

“Negotiations will continue in coming weeks and inevitably a compromise package of reforms will be brought before Congress for a vote.”