Wednesday, 27 July, 2016
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.
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