TD Securities: No inflation means the market is underpricing chances of a rate cut

Getty/Doug Pensinger

The TD Securities monthly inflation gauge for November, released today, again shows there is virtually no inflation, either core or headline, in Australia.

The headline print of a rise of just 0.1% follows last month’s no change and leaves the year-on-year rate of inflation at 1.8%. The trimed mean level was flat for the second month in a row, which saw the year-on-year growth rate rise just 1.6%.

Headline and trimmed inflation below the RBA 2-3% target band is too low and speaks of a weakness in the Australian economy that is not allowing businesses to materially recoup rising input costs from such things as the falling Australian dollar.

The wash up is that the market is now underpricing the chances of another RBA rate cut in 2016 according to Annette Beacher, chief Asia-Pac macro strategist at TD Securities.

Beacher said:

We expect the RBA Board tomorrow to end the year with a glass half full tone, leaving the cash rate at 2 per cent, and leave the easing bias on the table that was introduced last month. We are of the view that financial markets are not sufficiently pricing the risk that the RBA cuts in 2016, with the trigger being further downside disappointment in inflation.

Indeed, the RBA will not want to find itself travelling the road well travelled by the Bank of Japan, ECB, Bank of England and the US Fed. Another rate cut in 2016 would be insurance against such a trip.

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