Australia | Apr 01 2010
By Greg Peel
The TD Securities-Melbourne Institute inflation gauge was released this morning and showed a 0.5% rise to take annual headline inflation to 2.5% – right in the middle of the RBA's comfort zone. The figure implied February's tepid 0.1% rise was probably just a blip following January's 0.8% result.
According to Annette Beacher, Senior Strategist at TD Securities, “Our February survey revealed a brief breather in price increases but it appears that inflationary pressures are again building up a head of steam. Both imported and domestic inflation rose solidly this month, something we’ve not seen for nearly eighteen months. We remain of the view that the RBA’s projections for underlying inflation to decelerate from 3.4% to 2.5% by mid-year are somewhat optimistic, as Australia will be testing the speed limits of the economy sooner rather than later”.
Beacher nevertheless suggests the RBA will remain on hold next week, in line with its “gradual” tightening policy. However, it will be a “very close call”.
In contrast, Citi economists have this morning changed their minds and decided there will now be an April rate hike, having previously agreed with the TD Securities stance. The Citi report precedes the TD release.
In earlier forecasts, Citi assumed Australia's headline inflation would trough at 1.7% in the lag from the GFC, which is below the RBA's 2-3% target range. But they now believe the trough will be at 2.3%. If TD Securities' numbers are an indication, 2.3% may not be reached either.
[Note that the TD Securities gauge is not an “official” release, but given the ABS only releases CPI data quarterly in this country (and not monthly like everywhere else) it is a valuable guide which the RBA also acknowledges.]
Citi had expected core inflation (ex food and energy) to trough at the top of the RBA's range and this view hasn't changed.
Strong public sector investment, private sector engineering construction, housing investment, high dwelling rents, and less than weak employment are all conspiring to provide an environment in which domestic prices will be under upward pressure, Citi suggests.
Citi is targeting a cash rate of 6.25% by the end of 2011. Most economists are looking at a cash rate of 5.00% or higher by end 2010.