Australia’s weak September quarter annual core inflation figure of just 2.15%, the slowest annual increase since the June quarter of 2012, has certainly created a stir in the markets.
The Australian dollar has been smoked and the ASX 200 is now in positive territory, a stark reversal to what was seen prior to the release of the inflation report.
The chief reason for the reversal in both the Australian dollar and stocks is the increased expectation that the weak inflation read may prompt the RBA to cut the official cash rate to just 1.75% when it meets next week.
Cash rate futures put the odds of a 25 basis point rate cut in November at just 31% at the close of trade yesterday.
Now, in the wake of inflation report, those odds have surged to 62%.
While the majority of economists still believe that the RBA will leave the cash rate at 2.0%, the majority in markets now deem a rate cut as the most likely scenario.
Given recent out-of-cycle mortgage rate increases from Australia’s largest banks, something that has tightened financial conditions for the majority of Australian households, there is absolutely nothing in the inflation report to prevent the RBA from reducing interest rates next week.