💎 Fed’s first rate cut since 2020 set to trigger market. Find undervalued gems with Fair ValueSee Undervalued Stocks

UPDATE 1-Australia inflation muted but no smoking gun for rate cuts

Published 30/01/2019, 01:16 pm
UPDATE 1-Australia inflation muted but no smoking gun for rate cuts
AUD/USD
-

* CPI +0.5 pct q/q; +1.8 y/y - beating f'casts

* Core inflation averaged at 0.4 pct y/y

* Core measure undershoots RBA target for a third year

* A$ rises on headline inflation beat (Adds details, economist comments, A$ level)

By Wayne Cole and Swati Pandey

SYDNEY, Jan 30 (Reuters) - Australian consumer prices stayed soft last quarter as core inflation ended a third full year below the central bank's target band, providing the room for a cut in interest rates in the event economic growth slows sharply.

However, there was no trigger for any near term easing in policy as the headline consumer price index (CPI) rose 0.5 percent in the December quarter, surpassing forecasts for a 0.4 percent increase and sending the local dollar AUD=D3 rallying.

The Aussie touched a day's high of $0.7187 from $0.7150 before the data.

Annual CPI inflation ran at 1.8 percent, again beating estimates, the official data released on Wednesday showed. The biggest price increases in the quarter came from tobacco, food and recreation while clothing and footwear, health services and transport all fell. Taxes on tobacco alone accounted for half the rise in the CPI.

Importantly, key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) averaged around 1.75 percent for the year, in-line with forecast.

Core inflation has now undershot the RBA's long-term target band of 2 percent to 3 percent for 12 straight quarters, the longest stretch since the series began.

Economists expect the trend to persist in the current quarter pressured by a sharp decline in petrol prices.

"That means that further falls in headline inflation are on the way," said Ben Udy, Singapore-based economist for Capital Economics.

"We suspect that our expectations for a softening domestic economy mean that underlying inflation will struggle to pick up steam any time soon and the RBA will be forced to cut rates to stimulate the economy."

For the past couple of years, policy makers have argued that it would be counter productive to further reduce the policy rate from the record-low 1.50 percent in the hope of lifting inflation.

Lower rates would only encourage more borrowing, the RBA has said, inflating a housing bubble at a time when Australians were already saddled with massive amounts of debt.

That argument seems less tenable given house prices have suffered the steepest falls in two decades while banks have aggressively tightened lending standards and independently lifted rates on their mortgage books.

Investors have reacted by pricing in a realistic chance the RBA will eventually be forced to ease again, even if reluctantly. Futures 0#YIB: now imply a 52 percent probability of a quarter-point cut in the 1.5 percent cash rate by the end of this year.

The speculation intensified on Tuesday when a closely-watched survey of Australian business showed the sharpest decline in conditions since the global financial crisis. posed a challenge to the RBA which has long touted the strength of business sentiment as a reason for optimism on the economy.

"If the December update is accurately describing conditions across the Australian economy then this is a watershed moment," warned Westpac senior economist Andrew Hanlan.

The RBA will release its latest forecasts for the economy on Feb. 8 and will be under pressure to cut its previous call of growth a bit above 3 percent for both 2018 and 2019.

Such a downgrade means policymakers might soon have to temper their long-held view that the next move in rates will be up.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.