To quote:
"The SMP contains some significant changes to expectations for growth and inflation over the next few years:
**underlying inflation is expected to be running at 3% by late 2011 and remain at that rate for the next two years;
**headline inflation is expected to run well above the 2-3% target range over the balance of 2011; and
**aside from a natural disaster related pothole in the early part of 2011, the non-farm economy is expected to grow at better than trend rates over the forecast period.
These forecasts allow for the growth-depressing and inflation-restraining impact of a high Aussie dollar. And they are based on a technical assumption of a 50bpt rise in the cash rate over the forecast period. They also assume that households remain cautious indefinitely. This is a strong assumption relative to a labour market forecast that has employment growth as “solid” and the unemployment rate at 4¼% by end 2013.
The last time the RBA had forecasts showing inflation running at 3% or more was in February 2008. The cash rate was lifted by 25bpts at the time and a further 25bpts a month later.
This combination of forecasts and assumptions suggests to us that a rate rise was discussed at the May meeting. We had thought the key policy question was “what might bring a rate rise forward from our August call?”. But the question now is “what might prevent a rate rise from occurring earlier?”
An earlier move than our August call is likely if:
**the QI wage data (due 18 May) shows an acceleration;
**or if a trend decline in unemployment is evident (due 12 May);
**or if elevated capex plans are flowing into actual spending (ABS data due 26 May)."
