Chief economist update: RBA holds but for how long?

Of course, he'll say that!

"After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 21/4 per cent this year and then for growth gradually to pick up to around 3 per cent in 2021."

"The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

"The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending."

These were Reserve Bank of Australia (RBA) governor Philip Lowe's words after the board decided to keep the country's official cash rate unchanged at 0.75% at its November 5 meeting.

No central banker would go out and shoot his own foot, announcing to one and all that "we're doomed, we'll never make it" - that would just make it a self-fulfilling prophecy.

The same as Lowe's optimism, hopefully, becomes self-fulfilling.

But, but ... but, they may not have been an utter repetition, but these words and phrases rhyme with the governor's words just a month before the RBA's first of three interest rate reductions this year (so far) - and even more optimistic.

On May 7, Governor Lowe said: "The central scenario is for the Australian economy to grow by around 23/4 per cent in 2019 and 2020."

"The central scenario is for underlying inflation to be 13/4 per cent this year, 2 per cent in 2020 and a little higher after that."

"The main domestic uncertainty continues to be the outlook for household consumption."

Looking back at the first RBA meeting for 2019, Lowe was even more optimistic on growth and inflation at the start of the year, while at the same time tagging household consumption as the main source of uncertainty.

If you must know, the first time the RBA tagged "household consumption" as the major risk for its optimistic outlook on the domestic economy was in August 2017, acknowledging the trend deceleration in annual retail sales growth from a peak of 6.2% in 2014 to 2.2% by August 2017 and 1.6% in September of the same year. And that was before the trade war and the slowdown in global growth momentum, among others.

Two and a bit years on and household consumption remain weak, and as I've scribbled on this page yesterday, it's no longer a risk but a certainty.

Then again, monetary policy operates with a lag - it takes between 12-15 months for changes in interest rates to filter through into the economy - proving that the RBA is justified with its optimism.

The worry is that weak and weakening household consumption could become more entrenched before then, taking the Australian economy into a vicious cycle of decelerating growth.

Read more: Philip LoweReserve Bank of Australia
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