RBA signals potential for more easing - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the RBA today released its quarterly monetary policy statement and perhaps after easing its monetary policy stance this week, we should not be surprised to see some notable downgrades to inflation projections going forward.

Key Quotes

“What is perhaps surprising was the extent of the reductions to inflation forecasts. Just three months ago, the RBA was forecasting an underlying forecast range of 2%-3% for this year. That forecast is now 1%-2%.

Even in the year to June 2018, the inflation rate only gets back to 1.5%-2.5%, again below what three months ago was the forecast for this year. These updated forecasts also of course incorporate the action taken by the RBA this week and that has helped fuel expectations that further easing may be required. The 2-year government bond yield is 11bps lower today and a massive 48bps lower from the recent high on 26th April just before the Q1 inflation data was released.

Clearly the markets and the RBA under-estimated the downward pressures on domestic price pressures that currently prevail. AUD/USD is another example of the US dollar now looking under-valued based solely on rate spreads. The move in 2-year yields in Australia has taken the spread in Australia over the US to a cyclical low and points to further AUD/USD weakness.”