In its quarterly Statement on Monetary Policy, released on Friday, the RBA said that underlying inflation (its preferred measure) is expected to “remain steady at about 1.75 per cent until early 2019”.
At that point, underlying inflation is expected to increase to 2 per cent, said the statement – which could mark the beginning of a much-anticipated tightening cycle.
Previously, the RBA had assumed that inflation would average 2.5 per cent in mid-2019.
Australian GDP growth is expected to rise by 3.25 per cent by December 2018 and by 3.25 per cent over the year to December 2019.
Commenting on the statement, AMP Capital senior economist Diana Mousina said the RBA’s overall tone was “upbeat”, but its assumptions about economic growth were a little too optimistic.
“It appears that the RBA is using the global experience of lower for longer inflation (despite an improvement in growth and employment) as a leading indicator for Australia. Headline inflation is expected to start creeping into the 2-3 per cent target band in late 2018,” Ms Mousina said.
“The low inflation outlook painted by the RBA indicates that rate hikes will still be some time away. We remain of the view that an improving domestic growth landscape (helped by offshore) will allow the RBA to raise interest rates late next year, but the expectation that inflation will remain even lower for longer means that the risk is that rate hikes won’t start until 2019.”
