Westpac's chief economist Bill Evans on the Reserve Bank of Australia's Statement on Monetary Policy

Evans with his usual through analysis ... so I've cut it down to in brief, and any boldings are mine. The boldings are the super-brief summary:

Statement provided few surprises

  • Key growth and inflation forecasts for 2016 have remained the same as the November Statement
  • For 2017, there has been a modest reduction in forecast growth from 3.00-4.00%yr to 2.50-3.50%yr
  • The Bank has extended its forecast to June 2018, when it expects growth to lift to 3-4%yr
  • Reflecting the stronger than expected GDP report in the September quarter, forecast growth to December 2015 has been increased from 2.25%yr to 2.50%yr, but that still implies GDP growth in the December quarter will be around 0.5-0.6%

Underlying inflation forecast of 2-3%yr is unchanged

  • the commentary confirms the view that the lagged pass-through of the fall in the Australian dollar will add around 0.5% to underlying inflation in both 2016 and 2017

Assumptions behind the forecasts assume a lower terms of trade by 4% and a 30% fall in the oil price from US$52 per barrel in the November Statement to $US35 currently

  • The assumptions around the Australian dollar are USD0.72 and a TWI of 62 versus USD72 and a TWI of 61 in November

The most interesting discussion in the Statement is around the labour market

  • The Bank notes that labour market conditions improved by more than expected at the time of the November Statement
  • forecasting that the unemployment rate will fall further
  • accepts that employment growth will slow from the pace in the fourth quarter, but it is expected to remain strong enough to further reduce the unemployment rate
  • The Bank attributes the strong employment story to strong growth in the output of the more labour-intensive sectors of the economy, and of course the absence of any wage pressures
  • risk of the Bank being disappointed if further falls in the unemployment rate do not materialise will be a factor for policy
  • (WPAC) do not believe that our (WPAC's) forecast for an upward drift in the unemployment rate from 5.8% currently to around 6.0% would be enough to trigger a rate cut

China figures prominently as a risk to the forecasts

  • the Bank's central view is still one of a manageable slowdown in the Chinese economy, while accepting that any sharp adjustment is likely to be met with a further depreciation in the Australian dollar

The Bank does not include the Australian dollar in its list of uncertainties

  • Its current view is that the US Federal Reserve will continue with its normalisation policy
  • An abandonment by the Federal Reserve of this normalisation process would have significant implications for the Bank's Australian dollar assumption and therefore additional risk to the forecasts in this Statement

Conclusion

  • The general flavour of this statement is slightly more optimistic that we had expected
  • It is certainly not consistent with a Bank that is near cutting rates
  • However, risks remain, specifically around a disappointment in the expected further improvement in the labour market and a development around the US Federal Reserve that would change the Bank's outlook for further US rate hikes over the course of the next year or so
  • That second development could be expected to provide unwelcome upward pressure on the Australian dollar which would be a clear disappointment for the Bank