Australia’s core inflation reading – just 0.3% over the September quarter leaving the annual rate at 2.15% – has seen the odds for a rate cut from the RBA in November increased dramatically. Both the quarterly and annual rates were below even the most benign of economist forecasts, demonstrating just how far the reading missed to the downside.
Now that the inflation report has been run and won, it’s time to see what Australia’s economic community thinks about the benign inflation print, and its potential implications for monetary policy in the months ahead.
Here’s just some of the research notes that have hit our inbox so far.
Michael Blythe, chief economist at the CBA.
“The Q3 outcomes were lower than our forecasts, the overall market consensus and the RBA projections published in August. As such, the RBA may nudge down its near term inflation forecasts when the next Statement on Monetary Policy (SMP) is published on 6 November. They are likely to stick with the standard 2-3% range for the medium term projections.
More immediately, the Q3 price readings are not low enough to “demand” a rate cut at next week’s RBA Board meeting. Deflation is not a risk. Underlying inflation is still in the RBA’s target band, albeit at the low end. And there were some unusual price outcomes in Q3. Utilities prices fell in the quarter rather than recording the usual sizeable rise. The fall reflects the Australian Energy Regulator’s decision to lower network charges for electricity distribution. Some back of the envelope calculations suggest QIII CPI growth was 0.2ppts lower than otherwise would have been reported. This decision accounts for most of the forecast “error”.
The case for lower rates needs to be made by economic growth prospects and risks. That case is not complete. The cash rate should remain at 2% when the RBA meets next week. But the odds on a cut have clearly lifted.”
Jo Masters and Katie Hill, economists at ANZ
“Q3 CPI data revealed a weak inflation picture. Headline CPI rose by 0.5% q/q and just 1.5% year-ended. The underlying measures were also below expectations, and the average of these measures is now running at 1.7% on a six month annualised basis, well below the RBA’s target band. Weak price pressure was broad-based, with the only signs of strength in housing-related items. We have been expecting the RBA to cut rates early next year, but today’s data increases the chance of an earlier than expected move.”
Scott Haslem, economist at UBS
“Today’s inflation solidly beat expectations to the downside, with core at 0.25% q/q, one of the two lowest outcomes in almost 20 years. Key was heightened competition in a range of areas (esp. telecoms & supermarkets), while slowing in administered prices (health & utilities) are also helping. With the headline CPI below the RBA’s 2-3 target now for a year, and core inflation likely 0.25% percentage points below the RBA’s latest forecast, there’s little here to stop the RBA offsetting the recent regulatory inspired retail rate hikes when it meets next week (UBS -25bp to 1.75%).”
Chris Caton, chief economist at BT Financial Group
“Inflation is simply not a concern at present. Indeed, the September result is so low that it gives the Reserve Bank plenty of cover if it wishes to cut next week.
In my opinion, the Bank has been a reluctant cutter for some time, and of the view that the record-low cash rate should suffice. But, of course, borrowers don’t borrow at the cash rate. The recent decision by the major 4 banks to raise the variable mortgage rate, together with the possibility of more upward pressure as a result of the Government’s acceptance of the financial system enquiry (which advocated stronger banks and hence higher capital requirements), may mean that the “retail rate” is now higher than the RBA would like, in which case the probability of a rate cut increases. On the other hand (well I am an economist), the RBA may be quite happy to have some of the (localised) heat taken out of the property market. For the moment, we stay with our call of “on hold”, but look for any change in rhetoric from the Bank next week. The labour-market data in the next few months also take on great importance.”
Bill Evans, chief economist at Westpac
“We still expect the RBA to be on hold at its meeting next week. The surprise drop in the inflation measure is not unique and, in the past, the Bank has looked through a one off number.
The motivation for cutting next week would be a significant downward revision to the growth outlook. The data flow and the RBA’s recent commentary does not point to such an event. Consequently we expect rates to stay around the current record lows.”
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