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Posted August 14, 2018 by MoneyLink

Reserve Bank’s Optimistic Forecast

It was no surprise that Australia’s Reserve Bank left interest rates unchanged last week. What was surprising was that the RBA’s monthly statement by Governor Philip Lowe implied that there may be no need to raise rates until the end of 2019 or even 2020.

Positive economic forecast

RBA statements are usually boring unless you are an economist but this one was also remarkable in that it gave a very positive forecast for the Australian economy. It expects growth of a little over 3 per cent both this year and next. It is forecasting prosperity until the end of 2020.

Company profits are already increasing nicely. This is what is needed for companies to expand and invest more in their businesses. This will create more jobs and reduce unemployment. The RBA points to the continuing global economic expansion in advanced countries and China.

The driving force behind growth here will be mineral exports which are increasing in both volume and revenue. Demand and prices for coal are both much stronger than previously forecast. There are still two major LNG export projects to be completed and come on line.

The already strong government spending on infrastructure is forecast to increase further. Non-mining business investment is also expected to continue to grow with construction of office buildings, hotels and aged care facilities.

The RBA does acknowledge some uncertainties. One is international trade policy due to the US-initiated trade wars. Another is the drought in the rural sector. Consumer spending is also unclear with wage growth below average and household debt levels high.

Interest rates are tipped to stay low

The RBA suggests interest rates won’t rise for a while because inflation is low and unemployment high. It expects underlying inflation for the year to June 2018 to be 2 per cent. It forecasts inflation to fall slightly short term but edge back up to 2 per cent for the 2019 financial year.

The RBA’s target range for inflation is 2 to 3 per cent. Not until December 2019 does it expect it to be inside that at 2.25 per cent. Unemployment is expected to fall gradually to 5 per cent by December 2019. As it does wage demands will increase and add to inflation.

The outlook is positive

Only then does the RBA really need to think seriously about raising rates. So, the cost of finance for consumers and businesses should remain low for some time yet. This outlook is very good news for all of us, particularly investors.

Several private sector economists say they think the RBA is being too optimistic. However the RBA under former governor Glenn Stephens was always more optimistic than the economists, and it was right. Let’s hope it is again.

This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.

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