ANZ forecasts an interest rate hike in May as Australia's inflation outlook picks up

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Next Wednesday’s CPI report is likely to show inflationary pressures in the Australian economy have stabilised, ANZ says.

And that means the bank is sticking to its view that the RBA is on track to raise rates in May this year.

The bank is forecasting a slight pickup in the quarterly rate of growth for headline inflation, while it expects core inflation will remain steady:

Source: ANZ

The headline increase is likely to be driven by higher prices for petrol, domestic travel and tobacco.

And while the bank’s forecast for a 1.8% rise in core inflation remains below the RBA’s target range of 2-3%, ANZ senior economist Jo Masters said the numbers should lend some weight to the argument that inflationary forces are rising.

“Our forecasts are in line with those published in the RBA’s Statement on Monetary Policy, and consistent with the view that inflation has stabilised and is set to gradually rise over time,” she said.

“An outcome in line with our forecast will, we think, provide sufficient comfort around the inflation outlook to pave the way for a 25 basis point rate hike in May.”

ANZ’s current forecast is at odds with investment banks Morgan Stanley, UBS and Westpac — who all expect rates to stay on hold for the duration of 2018 — while Credit Suisse analysts raised the prospect of further rate cuts in a research note last week.

Masters attributed Australia’s sluggish core inflation growth to two familiar themes: consistently low wage growth and increased competition in the retail sector.

On the latter point, she said competition in the sector had actually led to outright deflation.

“In annual terms, prices are lower than a year ago for food, clothing & footwear, furnishings, household equipment and services, audio visual equipment, and games, toys and hobbies,” Masters said.

“Foreign entrants continue to open brick and mortar stores in Australia, while internet sales are growing strongly.

“Indeed, Australia Post reported a 20% increase of deliveries in December compared with the previous year.”

And although there’s been tentative signs wage growth for long-suffering Australian workers, Masters remains of the view that any pickup will be gradual.

Offsetting those factors, Masters said there’s some upside risk to housing inflation — citing the unexpectedly strong run of recent building approvals data in addition to a steady pipeline of construction activity.

Masters added that next week’s CPI data will be based on new data weightings which are updated annually, and a slightly revised methodology including the capture of digital products such as web streaming services.

“While it is difficult to measure the precise impact of these changes, we expect this will present a slight downward drag on the CPI,” she said.

In the event that quarterly inflation only records 0.3% — to the downside of ANZ’s 0.4% forecast — Masters said the outlook for rate hikes will become more dependent on quarterly wage growth data scheduled for February 21.

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