Macquarie, which cut its outlook for oil prices by almost 20%, now expects that to cap inflation adding to the case for Reserve Bank of Australia rate reductions.
The decrease in oil price estimate has shaved off 30 basis points from the bank’s consumer price gain forecast for 2017 and 2018 keeping it below 2%, Macquarie economist James McIntyre said in a note.
He continues to expect the central bank to cut interest rates twice this year to 1% from 1.5% now as inflation lags expectations. The RBA meets for the first time in 2017 to decide interest rates Tuesday and issues its quarterly Statement on Monetary Policy this Friday.
Inflation, or rather the lack of it, forced the last two quarter point rate reductions by the central bank in May and August 2016. Higher commodity and oil prices were expected to reflate the economy but Macquarie has changed its mind and thinks oil prices aren’t going anywhere further.
Relative to its previous outlook, oil prices are expected to stabilize around current levels as supply increases. Brent crude oil is expected to average US$57 per barrel in 2017 and US$56 in 2018, Macquarie said. That forecast is almost 20% below its previous estimate.
In Australian dollar terms, the revised forecast has Brent prices stabilising at current levels, with average prices in 2017, 2018 and 2019 of $77, $75 and $76, respectively. That is a reduction of 6.5%, 18% and 19% from estimates underpinning the bank’s Australian inflation outlook, it said.
The reduction in inflation forecast would also means the consumer price gain and monetary policy divergence with US will persist, the economist said. US price gains are backed by job additions and and wage growth. On the contrary Australian wage have increased just 2% and are about half a percentage point below US wages. The last time Australian wage inflation was trailing US by a similar magnitude was in 1998-2000 inflation when the RBA cash rate was in line, and then below, the US Federal Funds rate, McIntyre said.
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