Reserve Bank downgrades inflation outlook, with no rate hike in sight

AUD  USD Daily Price Chart

In its 70-page quarterly statement on monetary policy, the RBA lowered its inflation expectations.

The RBA also highlighted risks to global growth from rising trade protectionism, noting uncertainties around tit-for-tat tariff measures could "materially weaken the investment outlook and may weigh on confidence and financial market conditions more generally".

The AUD/JPY is trading into 81.70 following the Reserve Bank of Australia's (RBA) Statement of Monetary Policy, which saw little new information for traders as the central bank remains firmly entrenched within its wait-and-see pattern, while the RBA hopes that a continued decline in the Aussie against the US Dollar will see some kind of economic revival for Australia by boosting exports.

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

The Reserve Bank has officially downgraded its 2018 inflation forecast, expecting core and underlying inflation to climb 1.75% by December - down from 2.25% and 2% [respectively] projected in May.

Inflation has consistently undershot the RBA's target since early 2015 and was the major reason for the central bank cutting interest rates to the record low 1.5 per cent in August 2016 - where rates have been since then. Previously, it expected both core and underlying inflation to reach 2.25% by the middle of 2020.

Both headline and underlying inflation are now expected to be around 1.75 percent in the second half of 2018.

That's still the case, and the bank now expects the same growth rate to be maintained all the way through to December that year.

Despite the labour market tightening, however, the central bank sees only modest rises in inflation, which was most recently running at 2.1 per cent, and has been below its 2 to 3 per cent target range for much of the last three years.

RBA Governor, Philip Lowe, claims a "further gradual decline" in Australia's unemployment rate is expected over the next few years to around 5%.

Full employment (around 5 per cent unemployment) is not expected to happen until the end of 2020. Longer-term, the bank's growth projections were little-changed.

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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