INSIGHT: RBA Aug Cash Rate Cut Chance Remains After Q2 CPI

-Non-tradable CPI Up But In Line With RBA Forecast -CPI Data Unlikely To Change RBA View of "Quite Low" Inflation

By Sophia Rodrigues

SYDNEY (MNI) – Australia’s second-quarter inflation was in line with the Reserve Bank’s forecast and is unlikely to change the bank’s outlook of "quite low" inflation, which raises the prospect of a cash rate cut next week.

The decision, however, would also depend on monetary policy decisions by other key central banks because of the impact these could have on the Australian dollar. Both the U.S. Federal Reserve and the Bank of Japan are meeting this week, giving the RBA time to analyze their announcements. If the outlook is for the exchange rate to remain elevated, it supports the case for a cut.

The RBA’s cash rate decision is due 1430 hours local time Tuesday. The cash rate is currently at 1.75% and a majority of economists in an MNI poll expect a cut next week. The money market is pricing in a 50% chance of a 25 basis-point cut.

Data released earlier Wednesday showed Q2 headline inflation rose 0.4% q/q, rebounding from a fall the quarter before. However, the year-on-year pace slowed further to +1.0% from +1.3%.

The more important underlying inflation rose 0.45% q/q, slightly higher than the MNI median consensus for +0.4%, while the y/y pace slowed to the lowest on record -to +1.5% from +1.55% in Q1.

For the RBA, the details in the data are key as they drive the outlook for inflation, which is the basis for its monetary policy decision. Given this, the movement in non-tradable inflation takes on significance.

The data showed non-tradable inflation slowed to +0.4% q/q in Q2 from +0.6% in Q1. However, after seasonal adjustment, the data show an acceleration. According to Citigroup economists, non-tradable inflation rose 0.6% q/q after a 0.1% fall in Q1.

Such a rise isn’t likely to surprise the RBA because its forecasts already assume some pickup and the overall view that inflation is likely to remain "quite low" is unlikely to change.

In the minutes of the July board meeting, the RBA said "inflation was still expected to remain quite low for some time given very subdued growth in labor costs and very low cost pressures elsewhere in the world."

It is unlikely the RBA would ignore the fact that underlying inflation has fallen to the lowest on record and while non-tradable inflation has picked up, the pace may not be sufficient to get inflation back into the target band without additional easing.

The fall in headline inflation may also be a concern given the impact it could have on inflation expectations as it may ultimately feed through to non-tradable inflation via wage prices.

With the latest data showing headline inflation of +1.0% in Q2, inflation has remained below the RBA’s 2% to 3% target for seven straight quarters. The latest outcome is the slowest pace of gain during this period and the lowest since 1999.

There is a small possibility the RBA may decide to leave the cash rate unchanged next week, relying instead on market pricing to achieve a set of forecasts that would be consistent with its decision to hold policy. Such a decision would require the RBA to be confident that the exchange rate is unlikely to rise further.

——————————————————————————-
This message may contain confidential or privileged information. If you are not the intended recipient, please advise us immediately and delete this message.
The unauthorised use, disclosure, distribution and/or copying of this e-mail or any information it contains is prohibited.
This information is not, and should not be construed as, a recommendation, solicitation or offer to buy or sell any securities or related financial products. This information does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

---

Archr LLP is Authorised and regulated by the Financial Conduct Authority (FCA reference 617163).
Archr LLP is not covered by the Financial Services Compensation Scheme (FSCS).
Archr is registered in England and Wales No. OC371018. Registered office 115B Drysdale Street, Hoxton, London, United Kingdom, N1 6ND

This message may contain confidential or privileged information. If you are not the intended recipient, please advise us immediately and delete this message. The unauthorised use, disclosure, distribution and/or copying of this email or any information it contains is prohibited.

This information is not, and should not be construed as, a recommendation, solicitation or offer to buy and sell any securities or related financial products. This information does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

You are receiving this email because you are a valued client of Archr.