Australian June quarter consumer price inflation (CPI) report arrives tomorrow morning at 11.30am AEST.
While the RBA’s focus on inflation is perhaps not as strong as it was earlier in the year, given the fact that it’s a quarterly release, and that the RBA has consistently moved interest rates following its release in governor Glenn Stevens’ tenure, it is almost certain to be market-moving nonetheless.
From a survey of 24 leading market economists, inflation is expected to have risen by 0.8% over the quarter, courtesy of higher petrol prices, with the annual rate tipped to increase to 1.7% from 1.3% in the March quarter. Core inflation, far more important to the the RBA when it comes to monetary policy settings, is expected to gain by 0.6% over the quarter leaving the annual increase at 2.2%, at the lower end of the RBA’s 2-3% target band.
That’s the median market forecast – how about that of Australia’s big four banks?
Their assessment can be found below.
CBA (+0.9% QQ, +1.7% YY. Core +0.7% QQ, +2.4% YY)
“We expect the headline CPI to rise by 0.9% in the quarter, courtesy of a rebound in petrol prices. The annual inflation rate, at 1.7%, would remain below the bottom end of the RBA’s 2-3% target range. But a 0.7% rise in the more policy-relevant underlying CPI would have ongoing inflation running around the middle of the target band. Both outcomes would be a little higher than the RBA’s projections published in May. And both outcomes would be consistent with the RBA leaving the current 2% cash rate in place”.
The CBA believes that a quarterly increase in core CPI of 0.4%, or lower, would be required to “get a rate cut on the table for discussion”.
Westpac (+1.0% QQ, +1.9% YY. Core +0.5% QQ, +2.2% YY)
“A robust Q2 headline print is due to petrol and fresh fruit driving a bounce in tradable prices. This is supported by a ongoing steady gains in non-traded goods & services due to housing and health. As for the core, policy sensitive measures, the 6 month pulse will ease a touch to 2.3% yr from 2.6% in Q1 and 2.1% yr in Q4. If you exclude the two 2.1% yr prints in the last half of 2014, you have to go back to Q2 2013 to find a print of 2.2% or lower.
Behind the stronger headline CPI print are: the rebound in petrol from late Q1 through Q2 and into early Q3, a solid bounce in fruit & vegetable prices (4.5% qtr), and solid gains in medical & hospital services. Housing costs continue to rise (0.5% qtr) and this quarter household contents & services also gained (1.1% qtr)”.
ANZ (+0.9% QQ, +1.8% YY. Core +0.5% QQ, +2.2% YY)
“Q2 CPI data is expected to show relatively modest inflation in underlying/core terms.
We expect headline inflation to have been a high 0.9% q/q but this is significantly boosted by sharp increases in fuel prices in the quarter.
Underlying inflation is expected to have been modest at 0.5% q/q and 2.2% y/y. With the economy running at a below-trend pace and wages growth subdued, inflation is likely to remain comfortably within the RBA’s 2-3% target band. Inflation is therefore neither a constraint on further monetary easing, nor a threat to the current easy monetary policy stance”.
NAB (+0.8% QQ, +1.7% YY. Core +0.6% QQ, +2.3% YY)
“NAB expects a higher 0.8% q/q headline outcome (in line with market), driven by around a 12% q/q rise in petrol prices. The trimmed mean and weighted median measures are both expected to be around 0.6% q/q (also in line with market)”.
NAB’s FX strategy team also has an interesting tidbit for the markets to digest, particularly domestic rates and Australian dollar traders:
“On a daily change basis, it has been the top market mover (amongst the 10 top most important data releases for Australia) for the two year yield twice in the last five years. For the AUD/USD, this release created the third biggest daily move, on average, in two of the last five years. With only one release so far this year, it is too early to tell, but the outcome is likely to be market moving.
With the market priced for a small amount of RBA easing ahead, the risk is for a better than expected outcome; which would have the greatest effect on the AUD. NAB is looking for a relatively consensus outcome of 0.8%qoq and 1.7%yoy. The core measures are expected to remain within the RBA’s target band. Given this, it may require a big miss to the downside to elicit a negative AUD response”.
So there we have it. Despite a hefty increase in headline inflation, all four banks expect core inflation will remain in the lower half of the RBA’s 2-3% target band. Should the core reading accelerate or decelerate more than market expects, it will likely have implications for interest rates in the second half of the year.
During Stevens’ tenure as RBA governor the bank has reduced interest rates on 28 separate occasions. 15 times this occurred immediately after the release of the ABS’ quarterly inflation report, including the past four rate cuts.
For that reason markets will be glued to the screens when the data hits at 11.30am Sydney time tomorrow.