RBA turned more dovish, than what was suggested in the meeting statement, in May. As the minutes revealed, policymakers expected to cut the policy rate if inflation remains weak while the unemployment rate climb higher. The latest economic forecasts, published two weeks ago, were based on the assumptions that interest rates would be lower in six months’ period, suggesting that the economic performance would falter if no monetary easing added. Moreover, the minutes dropped the reference that there’s no strong case for a near-term move in the monetary policy, giving more hints that policymakers are getting to act.

At suggested in the minutes, members judged that “a decrease in the cash rate would likely be appropriate” if “inflation did not move any higher and unemployment trended up”. While the members had noted in the accompanying statement that they would closely monitor the job market, and believed that improvement of which would help lift inflation, they did not suggest a rate cut would come. RBA’s forward guidance also retained that it is “appropriate” to stand on the sideline.

As revealed earlier this month, RBA revised lower its GDP growth forecast to 2.3% y/y for last year, compared with February’s projection of +2.75%. It, however, maintained the forecasts for 2019 and 2020 unchanged at 2.75%. The central bank expects the unemployment rate to remain around 5% over 2019 and 2020 before declining a little to 4.75% in 2021. Meanwhile, underlying inflation was expected to be 1.75% over 2019, 2% over 2020 and “a little higher after that”. Note, however, that the above forecasts were made based on market pricing of future policy rate, which suggested that interest rates would drop “over the next 6 months”. As indicated clearly in the minutes, “without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favourable than the central scenario”.

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In April’s minutes, RBA affirmed that “there was not a strong case for a near-term adjustment in monetary policy”. Removal of this reference in the May minutes reinstate that the possibility of a rate cut has increased in coming months.

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