The RBA has downgraded its inflation forecast for this year

Irving Hamilton
August 12, 2018

The Aussie also lost ground in reaction to a dovish central bank monetary policy statement.

The Aussie and Kiwi plunged after a report said European Central Bank officials are growing concerned about the exposure of Euro Zone banks to Turkey's banking sector. However, the risks to global growth from trade protectionism have increased, the bank noted.

AUD fell from 0.7450 to 0.7381, a result of United States dollars strength while the Reserve Bank (RBA) appears to be progressively buoyant that the Australian economy is evolving as desired in the RBA's quarterly Statement on Monetary Policy (SoMP).

The central bank confirmed it has downgraded its 2018 inflation forecast, after flagging the change in Tuesday's rate decision.

"The Reserve Bank Board has for some time been of the view that holding the cash rate steady at 1.50 per cent would support the gradual progress being made on unemployment and inflation, with steady monetary policy promoting stability and confidence", RBA governor Philip Lowe said.

Core inflation is then seen rising slowly to 2.25 percent by the end of 2020, still below the midpoint of the RRA's 2-3 percent target band. The bank now expects core inflationary pressure to remain low all the through to the end of 2020.

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

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"On Tuesday the Bank already explained why near-term inflation is expected to be lower (underlying Dec 2019 lowered from 2 to 1¾%) while the optimistic mid-2019 GDP forecast of 3½% was shaved back to a more realistic 3¼% - now matching the Bank's rhetoric that GDP is likely to be "a bit above 3% this year and next".

The bank also expects the unemployment rate to hover around current levels of 5.5 per cent this year, before easing to 5.25 per cent by mid-2019.

Unemployment is forecast to remain around 5.25% to June 2020, before dipping to 5% in December that year.

GDP growth is seen at an average 3.25 percent percent over 2018 and 2019.

Concerning longer-term projection, underlying inflation is expected to climb, before to return to the bottom end of the RBA's 2-3% target by 2020.

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

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