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RBA likely to look through weak inflation rate

Apr 2016 - News

Core inflation is likely to have eased further in the first quarter this year, but this won’t be enough to force a cut to the cash rate, according to most economists.

They say the Reserve Bank of Australia’s focus on the improving labour market, along with business confidence and growth means it will look through softer consumer price data when it is published on Wednesday.

Headline inflation for the first three months is widely expected to come in at around 0.2 per cent quarter-on-quarter, and 1.7 per cent year-on-year, according to the latest Bloomberg survey of economists.

This compares with 0.4 per cent and 1.7 per cent, respectively, in the final quarter of 2015, with lower petrol prices likely to account for the difference.

The more important core inflation rate, too, is likely to come in slightly lower than in the 2015 fourth quarter, say economists. Core inflation excludes volatile items such as fuel.

Bank of America Merril Lynch, for one, sees it slipping below the bottom of the RBA’s target band of 2 per cent to 3 per cent for the first time since 2012.

The sort of disinflationary pressure – which can discourage consumer spending and business investment – has forced extreme monetary easing in Europe and Japan.

However, Australia is different, says BoAML, because of falling unemployment and improved economic indicators. The Australian dollar’s depreciation – which briefly reversed recently – will also translate into higher import prices, it says.

 “We forecast 0.5 per cent quarter-on-quarter for the core measure of inflation, which would see the annual measure decelerate to 1.9 per cent year-on-year,” wrote Australian economist Alex Joiner.

“Given the improvement in activity data, in our view, the RBA can tolerate this temporary deceleration below its target bound.”

However, a lower-than-expected quarterly reading, of 0.3 per cent for example, would push the year-on-year rate to its weakest on record. This, says BoAML, might force a cut to the cash rate – although it seems unlikely.

“On our forecast, we expect that the core rate of inflation will only dip below the target band temporarily, with the large adjustment in the exchange rate, which has only partially reversed recently, still putting upward pressure on [import] prices,” wrote Joiner.

 “Our forecast is also underpinned by wages growth being unlikely to decelerate materially further.”

National Australia Bank also expects a subdued headline CPI, of 0.1 per cent for the quarter and 1.6 per cent year-on-year, and a weak core reading.

“This quarter’s subdued outcome is expected to be driven by further large falls in petrol – down 11 per cent quarter-on-quarter – and fruit prices – down 9 per cent quarter-on-quarter – with subdued pressures from low wages and rental CPI growth,” wrote senior economist David de Garis.

“A subdued inflation outlook, of course, provides scope to ease policy should that be appropriate to support demand,” he said, “but in NAB’s opinion that support is currently not needed, with business conditions at pre-GFC levels and the unemployment rate at 5.7 per cent.

“With inflation expectations well anchored, the RBA can still hold faith that inflation should move back towards the middle of the 2 per cent to 3 per cent target band over the forecast horizon,” said David de Garis.

Aside from the CPI, there is little of note on the domestic front to drive local sentiment this week, save for first-quarter import and export prices, March credit data and and a speech in Jakarta on Friday by RBA assistant governor Guy Debelle.

According to futures pricing, the Australian stock market is set to open the holiday-shortened week up nearly 0.5 per cent on Tuesday, following gains across the world last week.

The US Federal Reserve will steal back the limelight early on Thursday Australian time when its Open Market Committee meets to decide its next move.

All Fed-watchers expect the US central bank to leave the main reference rate at 0.25-0.5 per cent, but the accompanying statement will provide clues on whether it may lift interest rates again in June.

The Reserve Bank of New Zealand is also widely tipped to leave the official cash rate at 2.25 per cent when it meets on Thursday.

 

 

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