Macquarie says inflationary pressures in Australia remain close to non-existent -- but that won't be enough for the RBA to cut rates

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  • Underlying consumer price inflation (CPI) in Australia has been very weak in recent years.
  • Macquarie Bank expects that trend will continue in the March quarter of 2018.
  • Despite the likelihood of another weak inflation reading, it’s still unlikely to warrant a cut to interest rates from the RBA.

Of all Australian data releases, few, if any, are as important as consumer price inflation (CPI).

As an inflation-targeting central bank, the ebs and flows in price pressures are highly influential on interest rate settings from the Reserve Bank of Australia (RBA).

For the best part of two years, the annual underlying CPI measure — far more influential in interest rate deliberations — has been stuck below the RBA’s 2-3% inflation target, helping to explain why the bank isn’t lifting interest rates like their compatriots at the Bank of Canada, Bank of England and the US Federal Reserve.

Macquarie Bank expects the weak trend in underlying inflation will continue when Australia’s March quarter CPI report is released in a little under two weeks time.

“Inflation is expected to have remained well-contained in Q1,” says Justin Fabo, Economist at Macquarie.

“The average of the trimmed mean and weighted median measures is expected to have been around 0.45% quarter-on-quarter and 1.8% year-on-year.”

If Macquarie is correct, the annual underlying CPI figure will decelerate from the 1.87% pace seen in the December quarter. It would also mark the third consecutive CPI report where the underlying measure has fallen from the previous quarter.

Source: Macquarie Bank

While, on the surface, that suggests the RBA should consider cutting rates to help boost economic activity and weaken the Australian dollar, Fabo notes that underlying CPI of around 1.8% would still be above the bank’s February forecast of 1.75%.

For headline CPI, that which doesn’t remove volatile price movements during the quarter, Macquarie is also tipping a modest increase for the March quarter.

“We expect headline CPI inflation to have been around 0.5% quarter-on-quarter following a rise of 0.6% in Q4 2017,” Fabo says. “Year-ended inflation would be 2.0%.”

In a speech delivered earlier this week, RBA Governor Philip Lowe said that inflation is “expected to gradually pick up”, suggesting stronger GDP growth and better labour market conditions should lead to a pick-up in wages growth, helping to boost price pressures.

However, with inflation still below the bank’s inflation target band, and not expected to return there until late mid-2020, Lowe said that while the next move in interest rates is likely to be up, not down, the RBA did not see a strong case for a near-term adjustment.

“A continuation of the current stance of monetary policy in Australia will help our economy adjust and should see further progress in reducing unemployment and having inflation return to target,” he said.

Macquarie agrees with this assessment, forecasting the RBA won’t begin to lift interest rates until early 2019.

The Australian Bureau of Statistics (ABS) will release Australia’s Q1 CPI report on Tuesday, April 24.

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