The message from the RBA’s cash rate cut and the quarterly Monetary Policy Statement last week is that more cash rate cuts are likely later this year and in 2017, even though the message is implied rather than explicit. The main clue to the RBA’s rate cutting intentions is in their latest set of economic forecasts. Essentially, the growth and inflation forecasts are identical to the forecasts the RBA produced in its previous quarterly statement back in May, although this time another half-year of forecasts out to December 2018 has been added and tellingly the forecasts for that period are identical to the forecasts for the first half of 2018. Notably, the RBA’s annual inflation forecasts now sit at a range of 1.5% to 2.5% y-o-y all the way out from the beginning of 2017 to the end of 2018 below the RBA’s 2% to 3% target range throughout the forecast period.

With these inflation forecasts the RBA is saying in effect that with all the information the RBA currently has to hand the Australian economy will not grow as fast as it could. The main reason that the RBA has used an inflation target for policy purposes over the past twenty years is that it provides a useful indication of the economic growth speed limit for the Australian economy. When inflation has threatened to rise consistently through the top of the RBA’s target band it has provided an indication that capacity in the economy is stretched and cost pressures are rising to the point that if left unchecked could cause price signals to become distorted leading to economic instability that would require a period of much weaker economic growth or even recession to correct.

Conversely, inflation running consistently below the RBA’s target band implies that economic growth is softer than it needs to be and that resources are underutilised. The unemployment rate is higher than it needs to be. There is also underemployment in the economy where many are unable to work as many hours as they would like. Even though there are pockets of strength in Australia’s economic, in total the economy is not using its resources as fully as it could. That is what the very low inflation readings so far this year are saying. Also, the RBA’s forecasts showing very low inflation persisting over at least the next two years on current policy settings, including the rate cut last week, is a signal that resources will continue to stay underutilised unless something changes to lift Australian economic growth.

There are factors that could change to lift Australian economic growth. The problem is that none of them look like coming in to play over the next year or two. One important factor is economic growth in Australia’s major trading partner economies. According to the RBA slightly softer economic growth in these economies over the next two years will be more hindrance than help to Australian growth prospects. Our biggest trade partner, China, is undergoing both a rebalancing of its economic growth drivers and economic reform. Both speak of a period of subdued growth. Other big Trade partners, Japan and South Korea, are also going through protracted slow growth periods. It seems unlikely that our major trading partners are going to provide a meaningful boost to our growth prospects much as indicated in the Reserve Bank’s forecasts.

Another important factor that could change is that the Australian dollar could depreciate substantially providing a significant boost to Australian export and import-competing companies. Could depreciate does not seem to be translating in to will depreciate any time soon. The Australian dollar exchange rate has become quite sticky and at a level higher than our export prices suggest it should be at. Our low interest rates by Australian standards are high by international standards and are supporting our currency. Also, although Australian growth is not as high as it could be, it looks pretty good compared with most other countries and is supporting capital inflow also propping the Australian dollar. In a world where growth is scarce just about every country is trying to depreciate their currencies to try and gain a bigger share of what limited growth there is in international trade.

A weaker Australian dollar would help lift growth prospects, but achieving a weaker currency is difficult. One important reason it is difficult is because our interest rates are still relatively too high.

Yet another factor that could change is that that the Government could relieve some of the pressure on the RBA by spending more. If the Government increased its spending it might go some way to compensate for too weak growth in private sector spending. Of course other issues come in to play as well. Our Government and many other governments around the world are looking at large budget deficits and an accumulation of government debt that they say argues not for lifting spending further, but rather for restraining spending growth. It is fair to say that the likelihood of the Government lifting spending to the point of boosting economic growth is very low. Instead the focus remains on budget restraint.

In summary, without a lift in the growth prospects of Australia’s major trading partners or a sizeable depreciation in the Australian dollar or a change towards a lift in spending by the Government the heavy lifting for Australian growth is left with the RBA and interest rates. The latest inflation forecasts by the RBA sitting below the 2% to 3% target band out to the end of 2018 say to us that the RBA will cut its cash rate again, probably in November and may need to cut further beyond that in 2017.