Rate cut still on the cards as inflation figures released

Rate cut still on the cards as inflation figures released

The official March 2017 quarter inflation figures show the Consumer Price Index is creeping back into the RBA’s ‘target band’ of 2-3 per cent, but a rate cut is not off the table.

The Australian Bureau of Statistics' (ABS's) March 2017 quarter Consumer Price Index shows inflation rose 0.5 per cent for the quarter and 2.1 per cent year-on-year.

The Reserve Bank of Australia's (RBA's) underlying measure of inflation (the average of the ABS's trimmed mean and weighted median figures) was up 0.4 per cent in the March quarter, with annual growth up 1.8 per cent.

 

Commenting on the figure, AMP Capital chief economist Shane Oliver said the latest move is slightly below market expectations but a welcome development for the RBA.

"The RBA targets inflation of 2-3 per cent over time, so the latest upward move in underlying inflation would certainly be welcomed by the central bank given that the RBA rate cuts in 2016 were largely in response to very low inflation readings," Mr Oliver said.

Yesterday's ABS figures are consistent with the RBA's inflation forecasts, which predict headline inflation of 2 per cent and underlying inflation of 1.75 per cent by the June quarter.

"While the March quarter inflation result slightly disappointed expectations, the RBA would be happy that inflation is moving in the right direction (into its 2-3 per cent target band)," Mr Oliver said.

"But underlying inflation is still too low and will probably remain below the RBA’s target band for the majority of 2017. Wages growth still remains around record lows, the economy is running below-trend which indicates that spare capacity exists and the Australian dollar remains too high, all which will keep a lid on underlying inflation.

"Our base case is that with inflation moving in the right direction and given the RBA’s increased emphasis on an inflated Sydney and Melbourne housing market and rising household debt, the RBA is unlikely to make any adjustments to interest rates any time soon and we expect it to keep the cash rate at 1.5 per cent for the next year at least.

"However, low underlying inflation pressures mean that there is still more chance of a rate cut this year than a rate hike."

 

Rate cut still on the cards as inflation figures released
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