Australia’s December quarter inflation report, released earlier today, came in mixed.
From a year earlier headline inflation accelerated to 1.7%, up from 1.5% in the September quarter, while core inflation – more influential on financial markets given its bearing on domestic interest rate movements – fell back to 2.0%, the lowest level seen since the June quarter of 2012.
It was a mixed bag, but the prevailing theme remained the same – inflationary pressures are close to non-existent.
Now that the event has come and gone, it’s time to see what Australia’s economic community makes of the release.
Like markets, the majority believe that the benign core inflation print, while at the bottom of the RBA’s 2-3% inflation band, won’t be enough to see the RBA cut interest rates next week.
Michael Workman, CBA
Inflation is not dead. It is just resting. Today’s 0.4% rise in the headline inflation rate was slightly above market, and our, expectations of 0.3%. The underlying measures averaged out at 0.5% which was in line with expectations. The annual inflation rates of 1.7% for headline and 2.0% for the underlying measures show that inflation is well under control.
The RBA’s first 2016 meeting is next Tuesday. We believe the low inflation outcomes will give them room to maintain their conditional easing bias. But they are unlikely to act on it unless there are signs of deterioration in the jobs market. And the improvement in the jobs data is remarkable. There have been an extraordinary 300k extra jobs added over the past year and the unemployment rate is at 5.8%.
Jo Masters, ANZ
Q4 CPI data were broadly in line with expectations and reinforce that inflation is neither a constraint nor a catalyst for monetary policy action. Underlying inflation is running around the bottom of the RBA’s 2-3% band, while headline inflation continues to be weighed down by fuel. There were signs of slightly stronger pass through from the lower AUD. By contrast, domestic inflationary pressure remained muted, with market services inflation moderating a touch and in line with weak growth in unit labour costs.
The low inflation environment is unlikely to be a catalyst for policy action given our expectation that underlying inflation will move back within the RBA’s 2-3% band in early 2017. However, it not a constraint on policy action should demand need a boost. We continue to closely watch demand indicators, including the December partials next week.
Tapas Strickland, NAB
The underlying inflation rate for Q4 is exactly in line with the RBA’s November Statement on Monetary policy which was for underlying inflation at 2.0% y/y.
With the Q4 outcome still very low, but showing evidence of some exchange rate pass through (tradables ex volatile items rose +0.8% q/q), the RBA may have greater confidence in its forecast that a pick-up in tradeables inflation will lift underlying inflation despite subdued non-tradeables inflation. Importantly, while inflation remains low, there is scant evidence that this reflects very weak demand, which would be more important for policy.
NAB’s view remains that the RBA will continue to hold interest rates at current levels on continuing signs that the domestic economy is performing somewhat better in recent months – evidenced by above average business conditions and solid employment growth.
Paul Bloxham, HSBC Australia
Underlying inflation this low is usually a recipe for an RBA cash rate cut. But not this time: or at least not yet.
Importantly, for the moment, the RBA can afford to tolerate low inflation because the jobs and activity indicators have been lifting. The unemployment rate fell to a two-year low of 5.8% in December and a key survey also shows that business conditions have been around 7-year highs recently (albeit falling back a little in the December print). While the labour market and activity surveys are still holding up, the RBA is unlikely to cut rates. This pretty much rules out a cut next week.
However, as today’s CPI numbers confirm, underlying inflation is no constraint on the RBA’s scope to cut rates, if they deem it necessary and useful for supporting growth.
Scott Haslem, UBS
Today’s CPI was broadly in line with market & RBA expectations, with the headline of 1.7% continuing to drift up toward the bottom of the target, while core measures – both q/q & y/y – have converged on a 2% pace. Pleasingly, the areas we’ve been highlighting as possibly flagging an era of lower inflation due to more competition in telecoms & food, rents & slowing administered prices (health & utilities), continue to moderate. While today’s CPI is no impediment to a rate cut, nor is it a smoking gun compelling the RBA to cut, given the economy’s ongoing moderate growth.
Shane Oliver, AMP Capital
The December quarter inflation figures continue to indicate that pricing power and inflationary pressures in Australia remain very weak. Underlying inflation, as measured by the trimmed mean and weighted median, averaging 2% year on year is at the bottom of the RBA’s target range, inflation excluding volatile and largely public sector driven items is even lower at just 1.8% year on year and beyond the higher cost of overseas holidays there is little sign of a pass through from the lower Australian dollar with tradeable inflation running at just 0.8% year on year.
As December quarter inflation was in line with RBA forecasts it is probably not low enough to bring on another rate cut from the RBA on its own. But with inflation running at the bottom of the 2-3% inflation target it leaves plenty of room for another rate cut and helps reinforce the RBA’s easing bias.
While the RBA may not be ready to cut the cash rate again next week our assessment remains that the ongoing downside risks to growth, further falls in commodity prices and global growth uncertainties along with low inflation will see the RBA cut rates again at some point in the next few months. Market pricing continues to allow for at least one more rate cut over the year ahead.
Chris Caton, BT Financial Group
Inflation remains low in Australia; low enough for the RBA to be able to ignore it if it wishes to cut rates further, but not so low that it mandates further loosening. Accordingly, the RBA will almost certainly sit tight next week, waiting for further evidence of slowing growth or a cessation of improvement in the labour market.
We continue to think that the cash rate is on hold for several months yet, and that the next move is just as likely to be up as to be down.
The RBA will hold its first monetary policy meeting for 2016 on February 2. Cash rate futures put the probability of a 25bps interest rate cut at just 6%, down from 21% before the CPI report was released.
Despite the diminished expectations for a near-term interest rate cut, markets are still fully priced for a reduction in the cash rate to 1.75% by September this year.
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