RBA To Leave Rates Unchanged. Revision In Growth And Inflation Forecasts Expected

The RBA will likely leave the cash rate unchanged at 4.75% on May 3 (Tuesday) despite accelerating inflationary pressures. Policymakers probably retain the view that the current monetary stance is 'mildly restrictive' and 'appropriate' given recent economic developments. Yet, rising inflation should trigger policymakers to resume tightening eventually. Another focus is the Monetary Policy Statement which will be released on Thursday. We expect to see modest downgrade on GDP growth forecasts but upward revision on inflation outlook.

 

Headline inflation jumped to +1.6% q/q in 1Q11, accelerating from +0.4% q/q in the prior quarter. On annual basis, the reading soared +3.3%, up from +2.7% in 4Q10. Same as many other countries, food and energy prices were the major sources of the rise in price level. The RBA's core inflation measures rose an average +0.85% in 1Q11and reached +2.25% from a year ago. With underlying inflation staying within RBA' target level, policymakers can stay on the sideline for now.

 

Policymakers will unveil their latest growth and inflation forecasts at the SMP. We expect the RBA will revise lower the annual GDP growth to 2.50% for the June 2011 estimate, from +3.25% projected in February. The downgrade is attributed to the fact that the recovery after the floods in Queensland appeared to have taken longer than expected. Growth for end-2011 will also be revised down to +3.75%, down from +4.25% as estimated in February. Concerning inflation, the RBA will probably revised higher its forecasts to +2.5% (February: +2.25%) and 3% (February: +2.75%) for June 2011 and +December 2011 respectively.

 

Slowdown in economic growth may not necessarily ease inflationary pressure. While it's widely expected that Australia's 1Q11 GDP growth will weaken after the floods, the disappointment will concentrate in the mining sector and exports. Indeed, the employment market is more indicative for inflationary outlook. Unemployment rate fell to 4.9% in March after staying at 5% over the past 2 months. The country added a large number of full-time workers in both March and February, signaling higher wage pressures which may be spilt to broader inflation.

 

The RBA will eventually resume tightening as uptrend of inflation will likely continue. We expect the appropriate timing is in 2H11 when the central bank is convinced by more strong inflation readings.