If people were looking for certainty on whether or not the Reserve Bank of Australia (RBA) will cut interest rates next week, it has not been provided by Australia’s June quarter CPI report.
Core inflation — an average of the trimmed mean and weighted median reading released by the Australian Bureau of Statistics (ABS) — rose by 0.4% for the quarter, leaving the year-on-year rate at just 1.5%, the lowest level on record.
Despite that headline grabbing statistic, the year-on-year rate was actually higher than the 1.4% level expected by financial markets. It was also bang in line with the RBA’a previous forecast from its most recent statement on monetary policy, released in early May.
As a result, doubts over whether the RBA will cut interest rates to a record-low level of 1.5% on August 2 — already present prior to CPI release — have grown.
From a two-in-three chance prior to the report, financial markets now put the odds of an additional 25 basis point cut at around 50%. Just like the RBA’s May interest rate meeting, it means that August’s rate decision — just six days away — will be a show-stopper for markets.
Line ball. Knife edge. 50/50. Whichever term you choose to use, it’ll almost certainly create interest (no pun intended), and further market volatility.
While financial markets are now siting on the fence, it’s time to see what the economic community has made of the release.
Before the inflation report arrived, 24 of 25 surveyed by Bloomberg were forecasting a rate cut in August. Has that view changed, or has the slightly hotter-than-expected core reading swayed anyone’s view?
It’s time to find out, starting with Michael Blythe of the Commonwealth Bank.
Michael Blythe, CBA
There was really only one question to answer from today’s CPI numbers: Is inflation low enough to justify market pricing and economist’s expectations for an August rate cut? The answer is a qualified yes. Inflation is low whichever way you cut the numbers. Headline inflation is running at the slowest pace since mid 1999. Underlying inflation is running at a record low. Inflation in the first half of 2016 ran at 1.25% (annualised) or well below the RBA’s 2-3% target band.
While the RBA will probably cut in August, taking the cash rate to a new record low of 1.5%, we suspect that they will do so through gritted teeth. It is arguable that the domestic economy is in need of any additional stimulus at this point. here is a respectable line of argument that further rate cuts may not help. And that cuts may just add fuel to the housing market.
Looking ahead, today’s near consensus CPI outcome was in line with RBA forecasts published in May. So the starting point for the projections published in the August Statement on Monetary Policy (due 5 August) is unchanged. We expect the forecasts to show inflation running below the RBA’s 2-3% target band out to mid 2018 and remaining near the bottom of the band thereafter.
We continue to expect a further RBA rate cut in November, at which point the cash rate would sit at 1.25%.
Tim Toohey, Goldman Sachs
Weak enough to cut? Yes, we believe so.
Post the surprisingly weak 1Q16 CPI print, the RBA aggressively lowered further its inflation forecasts, in effect setting a high hurdle to future interest rate reductions as inflation outcomes would have to meet or undershoot the RBA’s inflation forecast profile. We believe today’s inflation data has cleared the RBA’s own hurdle. Indeed, our alternative measures of underlying inflation and breath of inflation measures suggest the hurdle has been comfortably cleared and further interest rate reductions are required to lower real interest rates and ease financial conditions.
We continue to expect the RBA to ease interest rates by 25bps in August and continue to forecast that the RBA will ease a further and final 25bps in November 2016.
Annette Beacher, TD Securities
June quarter underlying inflation, the RBA’s policy focus, barely moved from Mar quarter levels (1.52%/yr vs Q1 1.49%/yr). TD expected a weaker print (1.25%) while the market expected a step down to 1.4%/yr.
The RBA expected 1.5%/yr as per its May Statement on Monetary Policy (MPS) hence we do not see a clear trigger for action at this juncture and so we are pushing out our August cut into November.
Jo Masters, ANZ
Q2 CPI data were broadly in line with market expectations and confirm a weak inflationary pulse. Weak price pressures were broadly based across both tradable and non-tradable items. Low wage growth continues to impact, while tradable inflation is being weighed down by competitive pressures and margin compression. These trends have further to run, suggesting a weak inflation profile over the coming 12-18 months.
On balance, we continue to favour a rate cut at the 2 August RBA policy meeting. Rates markets have responded to the CPI with an adjustment in the OIS pricing for the next few RBA meetings of around 5bp. This takes the likelihood of an August cut to just over 50%. The upcoming FOMC and BoJ meetings will likely have a bearing on pricing and the AUD.
Tapas Strickland, NAB
Today’s Q2 CPI produced another relatively low quarterly inflation outcome, but perhaps importantly, did not reproduce the super-low Q1 CPI result.
Our attention is very much drawn to the All groups CPI excluding food and energy, which printed at 0.5% q/q, after 0.2% q/q in Q1 and a string of six 0.6% q/q outcomes prior to that. This sequence tends to highlight the important influence of both food and energy in driving recent very low inflation outcomes and also tends to suggest that the very low Q1 CPI outcome was something of an outlier rather than the start of a new very low trend for inflation in Australia.
NAB’s assessment is that while a further rate cut will be considered at next Tuesday’s meeting — and while the outcome is likely to be a close call — today’s CPI does not demand a further adjustment, especially with non-mining GDP above trend, business conditions above average, and reasonable employment growth outcomes.
Scott Haslem, UBS
Today’s Q2 CPI was in line with the RBA’s recently slashed mid-16 forecasts, albeit on some metrics it’s a little above what the market was pricing. The issue for the RBA is whether being ‘in line’ is low enough to outwork the ‘implied’ 25bp cut in their May SoMP forecasts, or whether the post-UK-leave resilience of both financial markets & global confidence, and the strong data flow in the US and domestically, leaves the RBA drifting away from their clearer easing bias at the July meeting, back to their ‘neutral’ post May cut stance.
On balance, we believe today’s CPI is enough to get the RBA across the line for a (final) cut in August, but the lack of downward surprise today, & better recent data, makes this a closer call.
Paul Bloxham, HSBC
As fate would have it, today’s CPI numbers were right on the mark for making next week’s decision a line ball call. Underlying inflation surprised the market a little to the upside, but was still just below the bottom edge of the 2-3% target band on a quarterly basis.
As we pointed out in our CPI preview, if the average of the two measures had been 0.4%, we saw a cut next week as a 60% chance; at 0.5%, we would have seen a cut as unlikely. At 0.45% q-o-q, these numbers do not decisively suggest a cut or a hold.
Our central view has the RBA cutting its cash rate by 25bp next week, to 1.50%. However, the Fed and Bank of Japan announcements, later this week, could now play a bigger role.
Shane Oliver, AMP
Quite clearly, deflationary pressures globally are continuing to be imported to Australia and intense competition domestically and historically weak wages growth are keeping price pressures low and inflation below target.
The June quarter inflation data is not low enough to make an RBA rate cut at next week’s meeting certain particularly given that recent economic data has been reasonably good. However, on balance we expect that the RBA will move again to help ensure that inflation expectations do not become entrenched below 2% as has been the case in several other countries, so that there is reasonable confidence that inflation will move back into the target zone in a reasonable time frame and to head off a rebound in the $A that will likely follow if it doesn’t cut again.
So we are continuing to allow for another 0.25% rate cut from the RBA at next week’s meeting.
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