Central bankers try to manage inflation, the economy, and unemployment via interest rates in pursuit of this trinity of goals.
But the ability to fulfill them is, in turn, influenced by consumer inflation expectations and how they move. Expectations are important because inflation whether too high, or too low, changes consumers behaviour and can become economically destabilising.
So, news yesterday from the Melbourne Institute that Australian consumer inflation expectations fell 0.2% to 3.3%, while the broader measure fell to 2.1%, will unsettle the RBA and likely bring it closer to a rate cut. That’s despite growth in Australia continues to print above 3% on an annual basis.
Tapas Strickland, NAB in Sydney, said “economists tend to look at the weighted mean of responses falling in the 0-5% range when assessing expectations and this also fell to 2.1% and is now at its lowest levels since the GFC”.
It’s the risk of de-anchoring that will be worrying the Reserve Bank the most. And that, according to Strickland, means the chances of another rate cut remain high.
He said (our emphasis):
The RBA noted the risk of inflation expectations being persistently lower for longer in its August Statement on Monetary Policy: “The forecast rise in wage growth and inflation implicitly assumes an increase in expectations of future inflation. Various measures of inflation expectations are lower than their long-run averages, but most are still consistent with the medium-term inflation target. It is possible that inflation expectations will be lower for longer than is currently anticipated”.
There are hints in today’s survey and market pricing that “lower for longer” may now be playing out and given today’s numbers, the RBA will likely be watching inflation expectations closely.
And that means the chances of another cut have just gone up a notch.
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