In just two days, one of the most influential data releases in Australia will arrive – the June quarter consumer price inflation (CPI) report.
From your wage increase to interest rates, real investment returns to movements in the Australian dollar, this report is one of the most, if not the most, important data releases for financial markets.
Everyone is interested in it, and this release will be no exception. Indeed, given widespread expectations that the Reserve Bank of Australia (RBA) will cut interest rates in August — just six days after it is released — it could be argued that this release could be the most influential on the Australian economy and markets this year.
After a stunningly low reading in the March quarter, something that prompted the RBA to cut interest rates to a record-low level of just 1.75% at its May policy meeting, economists expect that inflationary pressures rebounded modestly in the three months to June, but not by enough to prevent another rate cut from the RBA.
After declining 0.2% in the March quarter — indicating deflation — headline inflation is tipped to rise by 0.4% in Q2. Despite the modest acceleration, the annual rate is forecast to slow to 1.1%, down from 1.3% in Q1. If correct, it will mark the slowest annual increase in consumer prices since the June quarter of 1999.
With Australia’s wage price index already running at the lowest level since records began in 1997, and given many employers use this inflation figure as a gauge on employee wage increases, such a low figure will not bode well for those expecting a hefty pay increase in the second half of the year.
Beyond the headline CPI figure, core inflation — far more important for financial markets given the relationship between it and movements in Australian interest rates — is tipped to rise by 0.4% during the quarter, leaving the annual increase at 1.4%. If the median economist forecast is on the money, it will see the annual core inflation rate slow to 1.25% from 1.55% in Q1.
Not only will this mark the slowest annual increase in core inflation on record, it would also be 0.1% below forecasts offered by the RBA in its most recent statement on monetary policy, released in early May.
Although 0.1% might not seem like a significant amount, these forecasts were based on prevailing interest rate expectations at the time the SOMP was published. In early May, markets were expecting the cash rate to sit at 1.5% by the beginning of 2017, below its present level of 1.75%.
Given the core CPI reading risks undershooting forecasts offered by the RBA, and the knowledge that another rate cut was factored into these figures, it has helped to fuel expectations that a rate cut will be delivered on August 2.
Economists certainly think so. 24 of 25 surveyed by Bloomberg predict that the cash rate will be cut to 1.5% in August.
Financial markets are a little less certain that a rate cut will arrive, with cash rate futures currently pricing the odds of a 25 basis point reduction at 71%. Very high, but not a certainty.
With financial markets now in wait-and-see mode before the Q2 CPI report hits, it’s time to see what individual economists expect will eventuate on Wednesday at 11.30am AEST.
Here’s just a selection of some of the research notes that have hit our inbox over the past week.
Bill Evans, Westpac
Westpac’s forecast for underlying inflation in the quarter is 0.35% which would support the need for another move given that core inflation would only have risen by 0.55% over the course of the first half of 2016, raising a genuine question mark as to whether even the Bank’s current 1.5%yr mid-point forecast for December 2016 could be achieved. A lower result for 2016 would also place their 2.0% forecast for 2017 (the bottom of the 2-3% target range) in jeopardy.
In the Statement on Monetary Policy in May, it forecast underlying inflation would print 1.5% for the year to June. With nearly 1.0% already being reached in the first 3 quarters, we can conclude that the Bank is expecting a 0.5% print for underlying inflation in the June quarter. That result would therefore be interpreted by the Bank as being in line with its overall inflation outlook, which is for underlying inflation to print 1.5% for calendar 2016 and 2.0% for calendar 2017.
Recall that the May forecasts assumed “market pricing” on interest rates, which incorporated a fully priced second rate cut by early 2017.
I think it is therefore reasonable to conclude that a 0.5% print for underlying inflation, although representing a sharp jump from March’s 0.2% print would be consistent with a follow up rate cut at the August meeting.
Michael Workman, Commonwealth Bank
The policy-relevant underlying measures of inflation should print a little lower than the headline rate. We expect the average of the RBA’s preferred statistical measures to lift by 0.4% for the quarter which would see annual growth ease to 1.4%. Such an outcome would have underlying inflation running at its lowest annual rate on record.
To us, a CPI print in line or below our call would mean an August rate cut is more likely than not, particularly given the AUD has trended higher in recent months and employment growth has eased (albeit the trend unemployment rate has edged lower). A CPI print above our forecasts, however, would complicate the August call, particularly given house prices and credit appetite have lifted as a result of the May rate cut.
Jo Masters, ANZ
Underlying inflationary pressures are expected to have remained subdued, and well below the RBA’s 2-3% policy target band. While the quarterly outcomes are forecast to be somewhat higher than in Q1, the average of the two core measures is forecast to decelerate to 1.4% y/y in Q2 from 1.5% y/y in Q1.
We see this data as critical to the likelihood of an August rate cut by the RBA. International developments, financial market stability and the AUD will also be key discussion points at the August policy meeting.
Our forecasts (0.4% QQ, 1.4% YY) are broadly in line with those presented by the RBA in the May SoMP. Outcomes in line with our expectations are unlikely to surprise the RBA, but are likely to be soft enough to keep an August rate cut on the table.
Tapas Strickland, NAB
NAB is forecasting a core inflation read of 0.4/0.5% for Q2, which we assess would be high enough to keep the RBA on hold. The weighted median is likely to be restrained by slowing rents to 0.4% q/q, while we expect a higher trimmed mean (0.5% q/q, risk of a 0.6% q/q as our forecast is close to 0.55%). The RBA is currently expecting a 0.4% outcome, so our forecast would have inflation tracking marginally above the May SoMP forecast track. We assess an outcome below 0.4% would likely see the RBA cut rates.
The subdued inflation outlook of course provides ample scope to ease policy should that be appropriate to support demand, but in NAB’s opinion that support currently is not clearly needed with business conditions at pre-GFC levels, the unemployment rate at 5.8%, and non-mining GDP growing at an above trend rate.
Scott Haslem, UBS
More importantly, for key ‘underlying’ CPI (3-measure average), we still see a low 0.5% q/q rise, after a record low 0.2% q/q compelled the RBA to cut rates 25bp in May. This ticks down the y/y to a new record low of 1.5% (was 1.6%), staying below the target for a 2nd consecutive quarter, albeit still in line with the RBA’s forecast of 1½% y/y.
Overall, the RBA is likely to cut 25bp in August if underlying CPI is 0.5% q/q or less; but 0.6% is a closer call, as this could see the y/y above the RBA’s forecast and suggest Q1 may have been an outlier.
Annette Beacher, TD Securities
The three monthly inflation gauge prints for the June quarter were unambiguously low, and we expect another weak official ABS quarterly CPI report, released July 27.
We expect the official Q2 trimmed measure to sink from 1.69%/yr to 1.26%/yr, and combined with the weighted median measure, we expect “underlying” inflation to sink from 1.53%/yr to 1.25%/yr. This is another 0.5 percentage points downside miss compared with the RBA’s projections and is a potential trigger for a cut next month.
We see our +0.2%/qtr and 1.25%/yr as a trigger for the RBA to cut on 2 August. A print closer to the RBA’s 1.5%/yr projection (i.e. 1.4%/yr or higher) likely sees the Bank sit tight.
Paul Bloxham, HSBC
If the average of the preferred underlying measures is 0.5% q-o-q or above, we think the RBA will be satisfied that underlying inflation is back in the target band and would hold its cash rate steady in August. At the same time, we think an average of 0.3% q-o-q or below would make a cash rate cut in August almost certain. At 0.4% q-o-q we expect a cash rate cut, but with less certainty (we think a 0.4% q-o-q would make a cut a 60:40 possibility).
Our central case sees the RBA cutting its cash rate by 25bp in August to 1.50%, but clearly this is highly conditional on the Q2 underlying CPI print.
You can follow me on Twitter: @david_scutt
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