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RBA at risk of ‘losing credibility’

The central bank has downgraded its GDP growth and inflation forecasts, prompting concerns that its monetary policy position may be undermining its credibility.

The Reserve Bank of Australia (RBA) has released its statement on monetary policy following its decision to hold the official cash rate at 1.5 per cent despite expectations of a cut.

The central bank has downgraded its forecasts for GDP growth to 2.75 per cent, down 75bps from 3.5 per cent six months prior.

Projections for inflation growth have also been revised, down 50bps, from 2.25 per cent to 1.75 per cent.

According to AMP’s chief economist, Shane Oliver, the downgrade signals a significant shift in the RBA’s outlook, with the statement reflecting an “implicit easing bias”.  

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“It would be wrong to interpret this month’s inaction as a sign that rate cuts are not on the way,” he said.

Mr Oliver added: “[The] RBA has effectively lowered its hurdle for a rate cut to be the absence of a further decline in unemployment, from being a rise in unemployment.”

The Reserve Bank of New Zealand (RBNZ) has already moved to cut rates, dropping the cash rate for the first time since November 2016.

Weaker than expected economic growth, subdued inflation data and softening housing market conditions were cited by RBNZ as drivers of its decision, mirroring conditions in the Australian economy.

Mr Oliver said he believes the RBA was deterred from cutting the cash rate by the current political environment.

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“The RBA’s desire to avoid the politicisation of interest rates and the political spin that would have been put on a rate cut probably played a big role in the decision to hold in May – not that they would admit to that,” he said.

Mr Oliver is expecting the RBA to make its move in June, which he said would be predominately driven by inflation trends.

“The basic problem for the RBA remains that inflation has been undershooting its forecasts and the 2-3 per cent target for around five years now,” he said.

“The longer this persists, the more it will lose credibility, seeing low inflation expectations become entrenched and risking a slide into deflation in the next economic downturn.”

[Related: Rate cut across the ditch foreshadows RBA move]

 

RBA at risk of ‘losing credibility’
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