The RBA’s quarterly Statement of Monetary Policy is due on May 9

In it the bank will update its growth and inflation forecasts and issue its latest commentary on the economy

Note that these updated forecasts will be used in deliberations at the upcoming board meeting on May 6 before they are published.

What should we expect on May 6 and 9?

  • The combined effect of lower-than-expected first quarter inflation and the higher exchange rate is expected to bring down the future inflation forecast
  • The inflation data showed that some elements of the higher-than-expected fourth quarter inflation were “noise”, and also that non-tradable inflation is trending lower (reflecting softer growth in wages)
  • Its likely that we see slightly lower growth and inflation projections from the RBA

Does this mean the RBA will bring back its easing bias, then? No, this is unlikely, as:

  • The RBA now appears more positive about growth prospects
  • Including for the labor market – recent strong employment reports & signs of improvement in other labor market indicators, including job advertisements
  • The RBA is also seeing signs of the household sector responding to lower rates
  • They also recognize that a further rate cut could have the potential to fuel house prices further
  • Thus, it doesn’t see a need for any more rate cut in this cycle unless there is a nasty surprise (note, though, it isn’t all sunshine and lollipops, one area that the RBA is concerned about is the fall in mining investments). Its unlikely the RBA will signal its readiness to ease the cash rate further even if there are signs of a bigger drop in mining investment with no corresponding lift in non-mining investments to fill the gap
  • Also, the RBA doesn’t appear to be concerned about a likely tighter federal budget which will be unveiled on May 13 – as their forecasts back in February already take into account fiscal restraint at both the federal and state government levels
  • On the AUD: the RBA recognizes the exchange rate is high by historical standards, but it doesn’t see it as uncomfortably high as the economy, including the labor market, has improved. Therefore an easing bias intended to bring down the exchange rate isn’t something the RBA is contemplating at present.

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The above is based on a research note provided by MNI (with thanks to them).