Shadow RBA spooked by inflation pimple


Gains against the yen and Swiss franc pushed the dollar index to a three-week high, tracking the rise in benchmark US 10-year Treasury yields.

He noted that low interest rates, tax cuts, infrastructure spending, rising house price and a recovering resources sector should all support growth. While the RBA still expects economic growth picking up to around 3% in 2021, it has downgraded its outlook for the year to around 2.25%. And don't forget that a year ago it expected growth this year of 3.25%.

Most economists expect the RBA will pause on further reductions until February to assess the impact of the recent rate cuts.

That impression was reinforced on Tuesday when - a day after September retail spending growth was shown to have fallen well short of expectations - the RBA trimmed its full-year economic growth forecast from 2.5 to 2.25 per cent in recognition of the fact that $22.4 billion in tax refunds have yet to stimulate consumer spending.

While inflation has been below the 2-3 per cent band for some time, I recognise that Australia is not alone in experiencing an extended period of low inflation, low unemployment and low interest rates.

Even the RBA statement implies an easing bias. In fact, overnight swaps are now pricing a 94.0% probability that the RBA will leave its benchmark interest rate unchanged, which is up quite significantly from the 60.4% probability on October 16 prior to the release of the high-impact Australia employment report that revealed the unemployment rate edged down slightly from 5.3% to 5.2%.

"...we remain of the view that further RBA monetary easing will be required and is likely".

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Annual inflation inched higher to 1.7 per cent in the September quarter, but has been below target for 15 consecutive quarters.

So now inflation will not be back at the bottom of the 2% range for at least two more years and certainly longer (unless there is an inflation-busting global event in the meantime).

"Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation".

"I have concluded after careful consideration ... that the existing statement is consistent with the government's and the RBA's shared understating of the monetary policy framework", Mr Frydenberg said.

The interpretation of meeting the inflation objective as being "on average" and "over time" has served Australia well and has contributed to the relative stability of the Australian economy.

"We've got a challenge at the moment, that inflation is abit too low but that doesn't mean that you should necessarily change the target". Making the target stricter - by requiring say a BoE style letter each time the target is breached - could force the RBA to become inflation nutters.

Three said both fiscal and monetary measures are needed while the remaining three would want a "structural reform", including measures to help the economy deal with climate change and remove red tape.