Australia | Nov 02 2009
By Andrew Nelson
Australian inflationary pressures appear to be remaining under control, with the TD Securities-Melbourne Institute Monthly Inflation Gauge showing a drop of 0.3% in October, following a no-change reading in the index in both August and September. In the twelve months to October the Inflation Gauge has risen by 1.2%, with it now six straight months that the reading has been below the bottom of the RBA’s 2-3% inflation target band.
La Trobe University’s Professor Don Harding, said that the October read pretty much confirms that the “inflation spectre is vanquished” for the upcoming December quarter. He went on to predict that the ABS CPI reading will also show deflation in the December quarter.
According to a release from TD Securities, the largest contributing factors to October’s slight decline were price falls for private motoring, fruit and vegetables, and financial services. The report notes that the price of automotive fuel fell by 5.8% in October, and is more than 20% below the level it was at 12 months ago. The price of tradeable goods is 2.1% lower than a year ago, which is consistent with the ongoing strength of the Australian dollar.
In fact, these factors would have had even greater influence in the moderate reading if not for the mitigating pressure coming from increases in the prices of holiday travel and accommodation, meals out and takeaway foods, books, newspapers and magazines, notes TD Securities.
TD Securities Senior Strategist Annette Beacher points out that the recent one-off policy change induced price spikes in July and if you were to take these out, then inflation pressures were actually absent in the subsequent three months. She points out that the bank’s trimmed mean measure of inflation has actually recorded outright declines in the last two months. This, says Beacher, supports the bank’s expectation that annual core inflation will fall below the upper end of the RBA 2-3% target band in early 2010.
She goes on to predict that at the RBA Board meeting tomorrow, these low inflation outcomes will most certainly be added to the “broad mix of data” that the central bank uses to assess Australia’s monetary policy.
“Purely on inflation grounds there could be a case for pausing,” says Beacher.
But looking at the bigger picture, which includes the nation’s export outperformance and the currently strong trade links with a reviving China, plus a resumption of house price inflation and the gradual normalising of market conditions, then it might be wise to accept the likely possibility of another 25bp rate hike to 3.5%. A more aggressive 50bp or more move, however, would be premature and “highly unlikely,” added Beacher.
Professor Harding is of a similar opinion, noting that the RBA will probably be more interested in the relatively high reading of the ABS September quarter CPI than by the weak levels of the TD-MI inflation gauge in August, September and October.
This leads him to also expect a 25bp increase in the cash rate tomorrow, as he feels the current data just aren’t strong enough to support a 50 basis point increase. In fact, Professor Harding expects the November increase will be the last one until at least March next year.