Australia | Jul 22 2009
By Chris Shaw
Just as other economic indicators have delivered broadly positive data in recent weeks, so too the news for Australia’s inflation outlook is improving, with headline CPI numbers for the June quarter coming in at 0.5% in quarter-on-quarter terms or 1.5% on a year-on-year basis.
The Reserve Bank of Australia’s (RBA) preferred measure of underlying inflation remains higher at 0.8% quarter-on-quarter and 3.8% year-on-year, which was slightly higher than expected and still above the target of 2-3%. ANZ Bank economist Riki Polygenis notes today’s data are consistent with a gradual reduction in inflationary pressures over the next two to three years.
This is particularly the case given tradables and services inflation appears to be heading lower, while Polygenis also notes there has been little evidence of any pass through effect from a stronger Australian dollar during the quarter. In terms of what drove today’s outcome fuel, hospital and medical services, rents, furniture and house purchase costs were higher, while falls were recorded in deposit and loan facilities, vegetables, fruit, overseas holidays and accomodation.
Commonwealth Bank senior economist Michael Workman expects the CPI will continue to trend lower in coming quarters as prices for imported items will benefit from the stronger Aussie currency, so he sees mixed implications for monetary policy from today’s result.
On the one hand Workman suggests today’s data plus the better recent economic data give the RBA scope to move from an easing bias to a neutral one when the reserve bank next updates on policy in August. But at the same time Workman suggests while the market is now pricing in no further cuts to rates there is still a significant risk of a further easing in coming months.
Westpac senior economist Anthony Thompson takes the view the latest data may cause the RBA to revise up its inflation forecast for 2011 to 2.0% from 1.5% currently, while he suggests today’s numbers detract from the case for further rate cuts as they indicate stronger than expected household demand pressures. With any significant shocks to RBA inflation forecasts now unlikely, Thompson expects official interest rates will remain on hold through early next year.
Looking to 2010 Workman takes the view the market is being overly aggressive in factoring in rate hikes from March next year as on his numbers any increases are not likely until the September quarter of 2010 at the earliest. Polygenis tends to side with Workman on this issue, suggesting it will be late in 2010 at the earliest before the RBA lifts rates.