The ABS has just released inflation data for the December quarter which showed a headline increase of just 0.2% (its lowest since outcome since December 2012), dropping the year on year headline rate to 1.7%.
To some commentators, like Stephen Koukoulas, this guarantees the RBA will cut rates.
The CPI bakes in the cake rate cut next week…. inflation is just too low
— Stephen Koukoulas (@TheKouk) January 28, 2015
But to others like Annette Beacher, Head of Asia Pacific Research at TD Securities, the fact that the trimmed mean of 0.7% printed 0.2% higher than expected and left the year on year rate at 2.2% it means rates will remain on hold.
Beacher told Sky Business soon after the number that she expects the RBA to refer to a “period of stability” in interest rates when the first monthly statement of the year is issued after the Board meeting next Tuesday.
Looking at the data itself you can see why there is such a disparity between the headline number and the trimmed mean given that transport (which includes fuel which dropped 6.8%) fell 2.2% on the quarter.
The question for the RBA Board when it meets next Tuesday is whether or not the economy is sufficiently weak, and whether falling inflation – at a headline level – is sufficiently low to drive to a change in consumer inflation expectations and thus influence their behaviour by causing them to delay purchases. The RBA does not want Australia to turn European, let alone Japanese.
Luckily, we know where Australian’s inflation expectations are after Westpac released its index last week. Justin Smirk, Westpac Senior Economist, said “consumer expectations for the annual pace of inflation fell 0.2ppts to 3.2% continuing the unwinding of the small spike to 4.1% in Nov. The trend is now flat at 3.5% since Sep 2014.”
So while inflationary expectations are low historically, they are higher than the actual level of inflation.
Another thing to recognise is that the RBA is prone to doing nothing, rather than something, for as long as possible and then act when needed. In that way they seek to do least harm to the economy. It is this passive/aggressive approach to monetary policy, combined with a floating Aussie dollar, which has kept the economy on an even keel, and helped contribute to the country’s 23 years without a recession.
So it’s worth noting that even though the Aussie has rallied almost a cent from the lows before the data, on decreased expectations of a February rate cut, it is still close to five-year lows at around 80 cents.
That’s a long way from the mid-90s against the dollar when the Governor started jawboning the Aussie down.
Again this implies there is no need for the RBA to rush.
But the economy is weaker than it could be, consumer confidence is below the long run average – as measured by the Westpac Consumer sentiment index – and the domestic economy is struggling outside of dwelling construction and housing.
So the preconditions for a rate cut are building. But after this CPI data the market is betting that the RBA has time on its side.