Australia | Apr 24 2012
By Greg Peel
By way of its April monetary policy statement the Reserve Bank of Australia was uncharacteristically candid in basically telling the market a rate cut was on the cards for May as long as the March quarter CPI result didn't surprise to the upside. The recently released minutes of that meeting were even more definitive.
No one was expecting an upside surprise, but there was plenty of surprise nevertheless on today's release of the CPI data – downside surprise. Economist consensus had headline inflation rising 0.6% in the quarter so the 0.1% result was quite a shock. The miserly growth rate means Australia's annual headline inflation rate has plunged to 1.6% from 3.1% in the December quarter last year, and a recent peak of 3.6% in the June quarter last year.
What caught everyone out was the “banana effect”, referring to volatility in fresh food prices which in Australia's case are often subject to droughts and flooding rains (and bush fires and cyclones). Food fell 2.1% in the quarter (bananas down 60%) to be 2.5% down on a year ago, when economists had expected only a 0.6% fall.
Another surprise was house purchase prices (owner-occupier), which fell 0.1% in the quarter. This doesn't seem all that surprising until one appreciates this price has only fallen in four quarters since the series began in 1988. Food price falls are expected but the house price fall suggests “something more fundamental is underway,” Westpac notes.
The RBA does not, however, count volatile food prices nor energy prices in its underlying measure and that rose 0.3% in the quarter when, again, economists had been expecting 0.6%. This takes the annual underlying rate to 2.1%, which is right on the bottom of the central bank's 2-3% target zone and down from 2.6% in the December quarter. There is no mandatory response requirement attached to this target zone – a low read simply means the board can feel more comfortable in easing policy.
The high Aussie dollar impact is clear in the headline split between “tradeables” inflation and “non-tradeables” inflation. Tradeables include food but also any imported items and they fell 1.4% to be down 1.5% year on year. By stark contrast, non-tradeables rose by 1.0% to be up 3.6% year on year. Inputs here include education (+6.0%), health (+4.4%), utilities (+2.1%), rents (+1.0%), petrol (+2.5%) and public transport (+4.6%).
The 3.6% is a little worrying as strictly it is outside the RBA's zone, but that figure is down from 3.9% in December and economists don't see it as impacting on the RBA's decision given the benign level of the net result. However, NAB's Rob Henderson suggests that “Bottom line, the excellent low inflation result might be flattering the actual inflation performance of the economy”.
Not to worry, as Henderson suggests the RBA will be able to respond to the political pressure it is under to deliver a 25 basis point cut in May and NAB's tip is now for another 25bps in June with potentially even more after that.
On first impressions Westpac notes only that “we see the annual pace of core inflation heading lower from here,” while St George counterparts are locking in May but stopping short of calling June a given. Commonwealth Bank's take is to see a May cut with “scope to cut further if desired”.
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