One of Australia's best forecasters expects another big inflation miss next week

Haziq Qadri / Barcroft India / Barcroft Media via Getty Images
  • Westpac Bank has an excellent track record for predicting Australian inflation outcomes.
  • It expects both headline and underlying inflation will decelerate sharply in the year to March, moving further away from the RBA’s inflation target.
  • The RBA has stated that a lack of progress in returning inflation to within its target is one scenario that could warrant further rate cuts.
  • Westpac expects the RBA will cut Australia’s cash rate in August and November, leaving it at a record low of 1%.

Of all the economic forecasters out there, few have a track record as good as Westpac Bank for accurately predicting Australian inflationary pressures.

More often than not, its views are close to or in line with how the data will print.

As such, we tend to pay attention to what it has to say, especially given the importance of inflation when it comes to monetary policy settings from the Reserve Bank of Australia (RBA).

Ahead of Australia’s Q1 consumer price inflation (CPI) report released next week, it’s just released its latest forecasts.

It expects inflationary pressures — already low — to weaken even further, placing additional pressure on the RBA to cut Australia’s cash rate further.

For headline CPI, it expects a paltry quarterly increase of just 0.1%, seeing the annual rate slow to just 1.4%, down from 1.8% in the December quarter last year.

“[The] main drag is fuel with falling clothing and holiday travel almost offsetting modest gains elsewhere,” said Justin Smirk, Senior Economist at Westpac.

As for underlying inflation, of more importance to the RBA when it comes to policy settings, Westpac is forecasting a paltry increase of 0.3% in the March quarter, an outcome that will see the year-ended rate fall to 1.6%, moving further away from the RBA’s target band of between 2% to 3%.

“Core inflation is to remain well below the bottom of the RBA target band as moderating housing costs hold back modest inflationary pressures elsewhere,” Smirk said.

“Overlay a competitive deflationary pressure in consumer goods and it is hard to see core inflation breaking much higher any time soon.”

It’s been three years since underlying inflation was within the RBA’s target.

Should Westpac be right that underlying inflation will slow to 1.6%, below the 1.8% level seen in the year to December, it will deliver one possible trigger for the RBA to cut rates given it has already said that a lack of progress in returning inflation to its target is one scenario that could warrant easier monetary policy settings.

Westpac expects the RBA will cut Australia’s cash rate again, calling for two 25 basis point reductions in August and November this year.

Other forecasters also see price pressures moderating further with the National Australia Bank, Commonwealth Bank and ANZ Bank all predicting that headline and underlying inflation will decelerate from the levels reported in the year to December quarter.

The NAB sees two 25 basis point rate cuts from the RBA this year. Despite weak inflationary pressures, both ANZ and the Commonwealth Bank see the cash rate remaining steady for the foreseeable future.

Australia’s CPI report will be released on Wednesday, April 24.

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