RBA maintains 2016 inflation and growth projections, lowers 2017 growth forecast

The RBA has kept the key inflation and growth projections unchanged for 2016. It has moderately lowered its projections for 2017 growth to 2.5%-3.5% from its earlier estimate of 3%-4%. The central bank has kept its 2017 inflation forecast unchanged at 2%-3%. The RBA has extended to its projections to June 2018, when it forecasts growth to expand to 3%-4%. The central bank has raised its growth forecast to December 2015 to 2.5% from 2.25%. However, this suggests that the GDP growth will be about 0.5%-0.6% in Q4.

The central bank Governor's statement confirms the view that the lagged pass-through of the Australian dollar's depreciation will add about 0.5% to the underlying inflation in 2016 and 2017. The idea behind the projections assumes a lower terms of trade by 4% and a 30% decline in the oil prices. Meanwhile, market now expects the cash rate to be lowered by 25bp in May.

The RBA has stated that the labor market conditions rebound more than expected at the time of its statement in November. Several indicators are consistent with the rebound in employment, including business surveys. The central bank projects that the jobless rate will decline further, as compared with November's projection that the jobless rate will be unchanged over the year. However, it does acknowledge that the employment growth will decelerate from the pace in Q4 2015, but it is likely to remain strong enough to further cut the jobless rate.

"We are also of the view that employment growth will slow, but we are less confident that the unemployment rate will fall further in the near term. This risk of the Bank being disappointed if further falls in the unemployment rate do not materialise will be a factor for policy. However, we do not believe that our forecast for an upward drift in the unemployment rate from 5.8% currently to around 6.0% would be enough to trigger a rate cut", says Westpac.