It wasn't just financial markets that moved on Australia's weak inflation report

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Outside of higher electricity and gas prices, Australian inflationary pressures were nowhere to be seen in the September quarter.

Headline consumer price inflation (CPI) rose by 0.6%, below forecasts for an increase of 0.8%, seeing the annual rate slow to 1.8%.

Underlying CPI, which eliminates the impact of volatile price movements, was even weaker, increasing by just 0.35% for the quarter.

That too was below market expectations for a larger increase of 0.5%, and left the year-on-year rate steady at 1.88%.

The annual underlying rate still remains below the Reserve Bank of Australia’s (RBA) target, continuing the pattern seen in each of the prior seven quarters.

Financial markets wasted no time in reacting to the soft inflation readings, selling the Aussie dollar and buying bonds, a move that suggests there’s now a smaller likelihood the RBA will lift interest rates for the first time in seven years at some point in 2018.

It wasn’t just financial markets that moved following inflation report’s release.

HSBC, one of the most hawkish forecasters in terms of the outlook for interest rates, has also reacted to report, pushing back the expected timing of when it expects the RBA will lift rates.

Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, explains:

The RBA is expected to need clearer evidence that inflation is lifting before it is likely to start to lift its cash rate. With this in mind, we are pushing back our call on the RBA hiking cycle. We have held the view since December 2016 that the RBA would start to lift its cash rate in Q1 2018. We still expect the cash rate to rise in 2018 but now expect that it may take a little longer for the RBA to get started. We now expect the first cash rate hike to be in Q2 2018. We still expect the cash rate to be 2.00% by the end of 2018.

Bloxham had previously forecast that the RBA would lift official interest rates at its February meeting next year, so while not a big forecast tweak, it underlines the point that continued weakness in inflationary pressures has dimmed the prospect of a near-term rate hike from the bank.

Before the inflation report was released, HSBC, Goldman Sachs and Laminar Capital were the only forecasters polled by Bloomberg who were looking for an increase in February next year.

By the end of next year a majority of forecasters still see the RBA lifting interest rates with only Morgan Stanley, Morgans Financial, Nomura Australia, RBC Capital Markets, St George and Westpac predicting that the cash rate will remain unchanged at 1.5%.

Market Economics is the sole forecaster still expecting interest rate cuts, predicting that the cash rate will sit at just 1% by the end of 2018.

NOW READ: Weak inflation means the RBA looks a long way from joining the global rate hike club

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