RBA Q3 SOMP: neutral at 3.5%

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The RBA’s Q3 SOMP was more cautious than I expected. The Bank basically just marked the current data to market, and permitted no bleed through of momentum into H2’12.

It’s not clear what this means, although given that they have a box on the problems the ABS has had with their population benchmarks (the bottom line being, focus on the unemployment rate and the employment to population rate), and that they write:

notwithstanding the possibility that some of the strength in the March quarter GDP may be revised away, the data currently suggest that growth in activity may have been above trend over the first half of the year, led by continued strength in resource investment and, as measured, a strong pick-up in household consumption volumes.

My guess is that they doubt that the economy was truly so strong in H1’12.

Comparison of their GDP forecasts shows their scepticism nicely. They have fully marked up their H1’12 GDP (+100bps to 3.75%y/y), however they assume that the rest of the forecast period is unchanged (the +50bps to 3.5% for Q4’12 is fully due to the H1’12 upgrade), and the consequence is that growth settles down back to 3%y/y (note also that they’ve dumped their H1’14 acceleration).

The fog of the 2% to 3% forecast band hides what this means for their inflation forecast. For Q4’12 it has meant +25bps to 2.5%y/y, however it’s hard to tell if this is due to a smaller output gap (as a result of a lower than expected unemployment rate, and prior above potential growth), or something else.

If we are to take the mid-point of the projection bands as being the central forecast, then an interesting conclusion pops out of the forecasts – that the RBA now believes that the neutral cash rate is ~3.5%. Their forecasts assume that the cash rate is unchanged at 3.5% for the entire period (plus the AUDUSD at 1.06 / TWI at 79; and Brent at USD$108/bbl), and on this basis they have forecast growth at potential and inflation at target.

That’s how you know that you are at neutral … monetary policy neither boosts nor slows growth and inflation is steady at expected inflation.

My guess is that the downside risks will see the RBA revising down once again, and cutting – however given that they have modest assumptions, it might not be until Q1’13 that things are sufficiently disappointing to get that to occur. One thing’s for sure, it’s hard to see them cutting until their ‘trend everything’ forecasts change.

Note, however, that if I am right that neutral is ~3.5%, the cash rate could easily fall 100bps from here… a 100bps move below neutral is very normal.


  1. Very interesting, thanks Ricardo. Raises the question of whether we are on a secular downward rate path and one recession away from the zero bound ourselves.

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