RBA on Hold, (almost) notwithstanding CPI

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I thought RBA Deputy Gov Battellino’s speech today was aimed at taking the emphasis off tomorrow’s CPI report.

Rick’s emphasis on the fact that 4%yoy global growth is pretty good, and that in recent times the data had surprised on the upside of that forecast, seemed aimed at shifting the focus to growth data. The comment about easing if inflation was low was always conditional on demand needing a boost, and Rick seemed to be saying that he (the Bank?) does not think demand needs stimulating just now.

Things in financial markets have improved a lot since the RBA’s 4 October meeting, and the real data has been pretty good too. Given that the RBA’s central case is that we are at the bottom of a multi year investment led upswing, i would think that the most a 0.5%qoq for Q3 trimmed mean will get is a sigh of relief – for if the RBA is even partly right about growth, inflation is likely to trend up over the next few years.

I do not think that there has been sufficient evidence to convince the RBA that growth is going to be substantially weaker than they previously expected, over a long enough period of time, to say that inflation is now more likely to trend down toward the bottom of their target band.

My personal forecast is +0.6%qoq for the trimmed mean. I think it would take 0.4%qoq or lower to get a rate cut in November … But I am not convinced even a 0.4%qoq would do the trick without something to weaken the demand forecast a little further. Right now, I should think that their 2yr ahead forecast is around 2.75%yoy, down 50bps from the August SOMP.


  1. I think RBA is firmly on hold right now, no matter what the CPI outcome will be (unless we get +1.0% or more +0.2%) or less… but I think continuous weakness in housing and credit growth will result in at least one cut in 2012.

  2. Is this ex ante or ex post to the PPI release? Consumer final goods was one s.d. above the mean. Hard to see core being below the mean.
    Then again, maybe it’ll be a case of high CPI, lower core. I think CPI will be ~ 1%, so core around 0.8%.
    (Though, the last time I thought high and you thought low, I was wrong.)

    1. This forecast is post consumer goods PPI, however i was well pleased to get the high number as i feel it knocked out some of the downside risk. Consumer goods PPI is running around 7%yoy, and unit wage costs are elevated, so there is a decent amount of cost pressure coming through the economy – given this, there is a chance we get a random large CPI … I hope you are right!

  3. It seems to me Rick is saying we are watching with anxiety what is happening in Europe and will react when it is appropriate.

    He also says the main impact of Commodity price boom mark 2 has yet to impact here as yet.

    wouldn’t make sense to cut rate onlt to raise them again a few months down the track.

  4. I agree that even 0.4% q/q might not be enough for them to cut. I strongly believe that would be the wrong decision, but the faith in the China/resources/investment boom story is so strong on the board (especially Battellino and Stevens) that it would take downright deflation and a total meltdown in Europe for Battellino to change his tune.

    1. Trimmed mean 0.3 percent. Headline 0.6 percent.

      Chris Joye’s head just exploded.

  5. these new SA series are revised around a lot.

    the previous two we now know were both 0.8% which is far too high.

    keep rates where they are.

    1. Is anyone sure of how the revisions and the new print relate.

      Presumably, the way the index is constructed, if the old values were left at 0.6% the new core would need to be approx 0.5%?

      So really, we can only interpret the through-the year values?

  6. The Y/Y measures, that are more significant IMO, are in the low to mid two, and that alone would not justify a rat cut at this stage That’s exactly where the RBA would want to be now.

    But they may well consider other factors such as:

    – falling asset prices, including housing and stock market.
    – very subdued credit growth
    – high Australian dollar

    I think this low Q/Q inflation number is mainly the result of the above 3, which were exacerbated by the November double rate increase.

    Overall I think it would be wise to wait for more data, domestic and international, before moving the cash rate. You really would not want to make debt cheaper right now nor send that message to consumers: that move could be very painful to undo (a rate cut now may mean two or three rate increases not far down the road).

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