The deterioration in the economic outlook underpinning the latest interest rate cut was so minor it is barely detectable in new forecasts from the Reserve Bank of Australia.
In its Statement on Monetary Policy, released on Friday, the RBA said the steady outlook for inflation had given it scope to cut the cash rate to the new long-term low of 2.5 per cent on Tuesday.
“At the same time, indicators of demand have generally been a little soft, of late, and the outlook for activity has been lowered, with growth expected to remain below trend for a time,” the central bank said in the quarterly report.
But the lowering of the outlook for activity – measured by gross domestic product (GDP) – has been marginal.
In its May statement, the RBA forecast GDP growth of 2.5 per cent through the year to June 2013, 2.0 to 3.0 per cent in the year ending June 2014 and 2.5 to 4.0 per cent in the year to June 2015.
The revised forecasts show growth of 2.5 per cent in the year just ended, then 2.5 per cent the following year and 2.75 to 3.75 per cent the year after.
In each case the range of uncertainty has been reduced, as might be expected as the forecast period draws nearer, but the centre of the range is unchanged.
There has been no significant change to the big picture.
In fact, the only notable change was in the outlook for growth through 2013 which, back in May, was forecast to be 2.5 per cent but which has now been trimmed to 2.25 per cent.
The RBA rounds its forecasts to the nearest quarter per cent, so this is, literally, the smallest change it could have made.
The RBA’s outlook for the global economy has been watered down since May and, as ever, the central bank is wary of the risks, particularly for Europe, “where the risks continue to be tilted to the downside”.
For the local economy, a key risk is the exchange rate.
The Aussie dollar could hamper the economy’s “rebalancing” if it stays high, or “deliver above-trend growth sooner than forecast” if it falls again by as much as it has so far, the RBA said.
Although the RBA didn’t – and never would – say so in the statement, it’s likely that the rate cut on Tuesday was aimed at ensure the exchange rate helped, rather than hindered, the economy’s transition away from mining investment and return to normality.
In any case, the rate cut clearly wasn’t a response to a dramatic worsening of the economic outlook, because the RBA obviously doesn’t think the outlook has changed much at all.
