• The Reserve Bank of Australia’s (RBA) quarterly Statement on Monetary Policy (SoMP) is about to be released, including updated economic forecasts.
• Downgrades to GDP growth and inflation are expected. A slower decline in unemployment may also be on the cards.
• The SoMP will be released at 11.30am AEST.

The Reserve Bank of Australia’s (RBA) quarterly Statement on Monetary Policy (SoMP) will be released on Friday, including updated economic forecasts on GDP growth, unemployment and inflation.

Ahead of the release of the important document, here’s a chart from Westpac showing current market pricing for the cash rate out to the middle of next year.

Westpac has indicated what market pricing was looking like three months, one month and one week ago. Expectations for policy easing have been trimmed a little, following the RBA’s decision to keep Australia’s cash rate steady at 1.5%, although nearly 50 basis points of cut are still expected by June 2020.

Before the RBA releases its updated forecasts, the table below shows what its forecasts were three months ago, and, before that, in November last year.

Today, GDP growth by the end of this year looks set to be trimmed to 2.75%. The year-ended growth figure for 2020 is set to remain at 2.75%, according to recent commentary from the RBA.

For underlying inflation, the expected return to the bottom of the RBA’s 2-3% target, originally seen by the end of 2019, is likely to be pushed back to the end of 2020.

On unemployment, the RBA said earlier this week that it’s expected to remain around 5% “over the next year or so” before declining a little to 4.75% in 2021. It previously saw unemployment falling to 4.75% by the end of 2020. That implies the new forecasts may show a slightly slower and later decline in the unemployment rate.

Curiously, despite implying that underlying inflation will return to 2% by the end of next year, the RBA stated this week that a “further improvement in the labour market was likely to be needed for inflation to be consistent with the target.”

The flagged forecasts changes suggest that’s not required to lift inflation back to 2%, creating some confusion in markets in recent days.

The actual forecasts today may shed some light on the seemingly contradictory message delivered by the RBA in its May policy statement.

A further improvement [in inflation] could take a number of forms — lower unemployment, stronger wages, reduced underemployment, or some combination of all three,” said Ivan Colhoun, Chief Markets Economist at the National Australia Bank (NAB).

It’s also worthwhile pointing out that the RBA’s forecasts are underpinned by technical assumptions such as the level of Brent crude, the level of the Australian dollar and, importantly, current market pricing for the cash rate.

The new assumptions are likely to show an expectation for a lower Australian dollar and higher crude prices. They will also incorporate a significantly larger amount of policy easing that what was the case three months ago.

Outside of the forecast changes, Colhoun at the NAB says the RBA’s statement may provide clues as to the near-term prospects for policy easing.

“Watch closely for whether the Board drops the judgment that there is ‘no strong case to adjust the cash rate in the near term’ from the statement, something that has been in recent Board Minutes and the February Statement on Monetary Policy,” he said.

“We’d guess that’s likely, which would clear the way for a data-dependent move at a forthcoming meeting. If it remains in this morning’s SoMP, then the Bank remains on a slow path toward easing.”

The RBA SoMP will be released at 11.30am AEST.

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