RBA seen reining in growth outlook, edging higher its inflation forecast

The yield on Australia's 10-year government bond was at 2.82 per cent on Friday, having risen 17 basis points so far this month, mirroring the move in US Treasuries.

The Australian dollar edged higher over the weekend as the greenback retraced some of its recent advance and the yield on the US 10-year Treasury note slipped further away from 3 per cent after the pace of growth in the US slowed in the first quarter.

The latest reading on how China's economy is faring – manufacturing and non-manufacturing purchase manager indices for April – will be released on Monday.

Local investors will be keen to hear what the RBA thinks of the soft inflation data released last week and the seemingly faltering pace of employment growth.

The parsing of the statement will be followed later in the day by remarks from governor Phillip Lowe at a Reserve Bank board dinner in Adelaide.

Perhaps more important for market positioning will be the third RBA event this week, Friday's release of the latest Statement of Monetary Policy.

"My expectation is that the bank will back off a little with its 2018 growth forecast from 3.25 per cent to 3.0 per cent," Westpac chief economist Bill Evans said. "The 2019 forecast will remain the same at 3.25 per cent."

As for inflation, Mr Evans said the RBA potentially could tweak higher its forecast for December to 2 per cent from 1.75 per cent. "Such an adjustment would signal a more confident assessment of the inflation outlook as a result of the March quarter inflation report. We do not think that conclusion is justified."

TD Securities also sees the door open to a slightly upward tweak to the bank's inflation forecast.

"We tend to lean towards the hawkish side of the analyst spectrum as we are vigilant debt hawks," TD analysts said. "We don't share the view that heavily indebted households need the cash rate to remain at record lows indefinitely. How will record debt levels ever decline if there is no expectation that rates will ever rise again?"

Investors are being cautioned not to read too much into the inflation forecast tweak - if there is one.

RBC Capital Markets' Australian chief economist Su-Lin Ong said an upward revision "would not materially change our view".

"Our own forecasts suggest that core inflation largely lingers around 1.9 to 2 per cent for much of this year and does not move comfortably above 2 per cent until [the first half of ] 2019 so we would caution that any such revision to the RBA's forecasts would still imply a pretty well behaved inflation outlook.

"Whether the RBA begins to normalise policy in H1 2019 (which is our base case) will likely depend on a range of factors with labour market developments remaining key in our view."

Likewise, while a near-term forecast adjustment is expected by most economists, the medium-term is seen intact.

"We think the Bank will leave its mid-2020 forecasts for unemployment and core inflation unchanged at 5.25 per cent and 2.25 per cent respectively," wrote ANZ head of Australian Economics David Plank.

"That will reinforce the RBA's message that progress toward its policy objectives remains gradual."

Timothy Moore writes the daily Before the Bell column. Based in Vancouver, Tim is an online business editor and reports on monetary policy, equities, commodities and currencies. Tim worked at Bloomberg for more than 12 years in Canada and Australia before joining The Australian Financial Review in 2005.