RBA trims inflation projections on low wage growth

Australian dollar feels the heat

The June quarter inflation outcomes were in line with the forecasts in the May Statement.

Inflation has consistently undershot the RBA's target since early 2015 and was the major reason for the central bank cutting interest rates to the record low 1.5 per cent in August 2016 - where rates have been since then.

The RBA now sees underlying inflation slowing to 1.75 percent by the end of this year, down from a previous forecast of 2 percent.

Beyond that time frame, the central bank kept its inflation forecasts relatively unchanged.

Wages have edged higher in the past year but income growth remains below its long-term average and consumers are still watching their spending as a result, the Reserve Bank says.

In Tuesday's rate announcement, Lowe also said that "a further gradual decline in the unemployment rate is expected over the next couple of years to around 5%".

Full employment (around 5 per cent unemployment) is not expected to happen until the end of 2020.

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A drop in electricity prices across some Australian cities, coupled with reduced child care and other service prices are attributed for the near-term downgrade.

The Reserve Bank of Australia (RBA) expects growth in the A$1.8 trillion economy to accelerate to 3.25 percent in 2018 and 2019 before easing slightly to 3 percent in 2020. Longer-term, the bank's growth projections were little-changed.

Most noticeably, the changes in today's SoMP is the RBA's inflation projections. The central bank still expects underlying inflation to return to the bottom end of its 2-3% target range by 2020. Previously, it expected both core and underlying inflation to reach 2.25% by the middle of 2020.

The latest set of projections confirmed that the RBA still looks set to keep interest rates on hold for the foreseeable future.

Annette Beacher, Chief Asia-Pacific Macro Strategist at TD Securities, notes that the RBA delivered an as-expected upbeat outlook for the global economy and constructive view on the domestic economy.

"Given the gradual nature of the improvement, however, the Board does not see a strong case to adjust the cash rate in the near term".

Subdued wages growth, at around 2 per cent, is also adding downward pressure on consumer prices despite a solid run of jobs growth since 2017.

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