RBA expectations

There is a modest inconsistency in the RBA forecasts.

Note that the recently released May forecasts call for a longer “return to target” for inflation (bottom left) whilst simultaneously lifting the employment forecast (second row, first column, alternatively a lower unemployment rate, bottom row, second column) and a slightly higher terminal GDP rate (second column, second row).

You can see why some would say “well, based on your central bank reaction function that would be an environment to hike, your inflation forecast doesn’t return to target for several years based on how you expect the economy to evolve, in turn predicated on how you’ve set monetary policy”.

That is indeed confusing.

I think, in the back of their minds, they are simply very worried about non-linear issues, like housing investment collapsing, with negative sectoral spillovers, something similar for the consumer, who reaches a breaking point. It’s “off camera downside risk” that they are worried about.

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