Despite an unprecedented level of monetary policy easing from major central banks in the post-GFC period, global disinflationary pressures remain firmly entrenched.
On the back of a sharp downturn in commodity prices and many developed nations operating a negative output gap, central bank after central bank is undershooting on their inflation targets
As the chart from ANZ shows below, there is next to no inflation, including from the likes of the United Stats and United Kingdom.
According to Jo Masters, Katie Hill and Giulia Specchia, members of ANZ’s economics team, Australia is not immune to this phenomenon. Indeed, Australia’s core inflation rate, that which RBA monetary policy is based upon, currently sits at the bottom end of the bank’s 2-3% target band.
Given the Australian dollar’s steep decline over the past two years, it’s a remarkable outcome.
“In part this reflects the commodity price cycle – and notably oil – but there is evidence that domestic inflation pressures are becoming more sensitive to global forces in a more integrated world,” say Masters, Hill and Specchia.
The trio suggest global influences, or tradable inflation, account for around half of the movement in Australia’s headline inflation figure, with the other half made up by domestic price influences, or non-tradable inflation.
Despite recent signs of strengthening in Australia’s labour market, including the stellar 58,600 job boom recorded in October, they suggest that the outlook for inflation remains subdued.
“With the global inflation pulse expected to remain negative, domestic price pressures will have to run above long-term averages to push inflation higher,” they wrote in a research note released earlier today. “This seems unlikely given intense global competition, anaemic wage pressure, soft domestic demand, and a slowing in the property market.”
Essentially, given global inflationary pressures are unlikely to accelerate, it’s unlikely that domestic price pressures will ensue due to tepid wage growth, weak domestic demand and a slowdown in the housing market, in their opinion.
As a result, ANZ has lowered their Australian inflation outlook, suggesting that Australia will “see a prolonged period with inflation below the RBA’s 2-3% target band”.
The chart below reveals the expected pathway for core and headline inflation in the two years ahead.
ANZ, unlike other banks which were calling for further rate cuts prior to yesterday’s hot jobs number, retains the view that RBA will cut interest rates by an additional 50 basis points by the end of the June quarter 2016.
While it admits that the strong labour market report for October makes a cash rate cut by February “less likely”, if correct on the inflation outlook, there is clearly little preventing the RBA from easing monetary policy further should domestic economic conditions warrant in the year ahead.
That fits with the view presented by RBA governor Glenn Stevens last week when he said “were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening”.
Currently financial markets suggest that it’s a line ball call whether Australian interest rates will further in early 2016.
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