RBA Tracker

Dwindling confidence

The RBA Board meets next week and the Bank will publish updated forecasts at the same time as the policy decision is announced.

Compared with the Bank’s February forecasts, the upside surprise to Q1 underlying inflation and lower-than-expected unemployment rate for the quarter will result in near-term tweaks to the forecasts (i.e. trimmed mean inflation a bit higher, and the jobless rate a little lower, than previously expected).

But it’s the outlook further out that matters most for gauging whether the current stance of monetary policy is appropriate.

The Board has been weighing up the contrasting risks that inflation could take longer to return to target versus growth turning out to be weaker than expected.

A month ago the Board judged that “the relative probability of these two sets of risks had become a little more even, as the incoming data had not indicated a materialisation of upside risks to inflation and as growth in output had slowed as expected”. As a result, the Board characterised the policy outlook “as one in which it was difficult to either rule in or out future changes in the cash rate target”.

While this was broadly considered to be a slight shift to a more ‘neutral’ policy stance, equally it revealed just how uncertain the Board is in the outlook. The Board noted that the “risks seemed broadly balanced” but left itself with significant optionality with regards to the cash rate outlook.

Central bankers are low on confidence

Overnight, Chairman Powell Powell talked a lot about falling confidence that US inflation will move lower this year. The RBA Board mentioned a month ago that it did not have sufficient confidence in its outlook for inflation:

“Members agreed that returning inflation to target remained the Board’s highest priority and that it would take some time before they could have sufficient confidence that this would occur within a reasonable timeframe.”

The run of data over the past month is likely to have diminished the Board’s confidence even more.