RBA strikes a bleak tone
Australian Financial Review Aug 5 2016 11:45 PM
Jacob Greber, Jonathan Shapiro
The Reserve Bank of Australia is being sucked towards adopting unconventional zero-rate monetary policy common throughout Europe, Britain and Japan after saying inflation is likely to stay below or at the bottom of its target range until 2019.
Such a run of weak inflation – which is being driven by sluggish wages growth and a far weaker labour market than most people recognise – would represent an unprecedented period in which price pressures are below where they should be.
The central bank in its quarterly statement on monetary policy, published on Friday, extended by six months the time in which inflation will undershoot – ramping up speculation this week's official rate cut won't be its last in the current easing cycle.
"Domestic factors such as heightened competitive pressure in retail markets, and low wage growth, have put downward pressure on retail inflation over recent years and are expected to persist for some time," officials wrote in the statement.
The labour market is rapidly emerging as a fresh source of concern for the bank, which has been surprised during the past year at the strength of employment. They warned that most of the gains have been in part-time employment among workers who would like more hours.
"There could be more spare capacity in the labour market than implied by the forecast for the unemployment rate," they said.
The bleak outlook provides the justification for the Reserve Bank's decision to cut the cash rate on Tuesday by a quarter of a percentage point to 1.5 per cent.
Analysts said the statement – which is replete with fresh concerns about risks ranging from China, the property market, and households consumption – suggest the central bank has retained a "strong easing bias".
All eyes will be on a speech next week by governor Glenn Stevens, who steps down next month after a decade leading the Reserve.
"We think he will cover familiar ground, arguing that central banks are having to shoulder too much of the burden of supporting growth given the limits of what can be achieved by monetary policy," said Felicity Emmett, an economist at ANZ.
Financial markets are pricing a 56 per cent chance of another official rate cut before the end of the year – this would take the cash rate into the realm where the Reserve Bank has previously indicated it would begin to consider alternative measures, potentially including quantitative easing, or even more radically, "helicopter money drops".
Officials said although the prospects for economic growth are "positive", they insisted there needs to be more growth.
Gross domestic product is forecast to grow 2.5 to 3.5 per cent during the coming year, and this is considered to be a normal-to-healthy pace.
However, underlying inflation is expected to stay between 1.5 and 2.5 per cent during 2017-18, six months more than was forecast three months ago.
JPMorgan economist Sally Auld said the forecasts imply the low inflation outlook has a strong structural element to it.
"All else equal, faster rates of economic growth are now necessary to generate inflation outcomes consistent with target," she said.
"It also implies an inherent sensitivity to activity data in coming quarters; any slippage on the growth front can't be tolerated given the risks it presents to an already subdued inflation outlook."