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22 Apr 2015
Australia CPI won't prevent May rate cut - Capital Economics
FXStreet (Bali) - Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, notes that despite Australi's CPI are not as weak as one would expect, it will not refrain the RBA from cutting rates in May.
Key Quotes
"Australia's CPI figures aren't as weak as we expected, but they are unlikely to prompt the RBA to abandon its plans to cut interest rates in early May."
"Ignore the fall in headline inflation from 1.7% in Q4 to 1.3% in Q1 (consensus 1.3%, CE 1.0%). This was due to a 12.2% q/q drop in petrol prices, which meant that overall prices rose by just 0.2% non-seasonally adjusted (consensus +0.2%, CE -0.1%). With petrol prices rising in recent weeks, inflation will rebound in Q2 and beyond.
"Instead, more important is that the 0.6% q/q rises in both the trimmed mean and weighted median measure of underlying prices were in line with seasonal norms and left the annual growth rates unchanged (2.3% and 2.4% respectively). It seems that the boost to inflation from the lower exchange rate is offsetting the drag from weak wage growth and the indirect effects from lower petrol/utility prices."
"We're not convinced this will continue. If we are right in expecting GDP growth to slow this year, then the drag on inflation from the weaker labour market will grow. Underlying inflation would then fall to the lower bound of the RBA's 2-3% range. We still expect the RBA to cut rates to 2.0% in May, from 2.25%, and probably further later in the year too."
Key Quotes
"Australia's CPI figures aren't as weak as we expected, but they are unlikely to prompt the RBA to abandon its plans to cut interest rates in early May."
"Ignore the fall in headline inflation from 1.7% in Q4 to 1.3% in Q1 (consensus 1.3%, CE 1.0%). This was due to a 12.2% q/q drop in petrol prices, which meant that overall prices rose by just 0.2% non-seasonally adjusted (consensus +0.2%, CE -0.1%). With petrol prices rising in recent weeks, inflation will rebound in Q2 and beyond.
"Instead, more important is that the 0.6% q/q rises in both the trimmed mean and weighted median measure of underlying prices were in line with seasonal norms and left the annual growth rates unchanged (2.3% and 2.4% respectively). It seems that the boost to inflation from the lower exchange rate is offsetting the drag from weak wage growth and the indirect effects from lower petrol/utility prices."
"We're not convinced this will continue. If we are right in expecting GDP growth to slow this year, then the drag on inflation from the weaker labour market will grow. Underlying inflation would then fall to the lower bound of the RBA's 2-3% range. We still expect the RBA to cut rates to 2.0% in May, from 2.25%, and probably further later in the year too."