Australian Inflation Stays Below Target, Signaling Rates on Hold

(Bloomberg) -- Australia’s consumer prices rose slightly less than forecast last quarter, suggesting the central bank is likely to keep interest rates on hold for the rest of this year.

Key Points:

  • Quarterly consumer price index climbed 0.4% vs estimate of 0.5%; annual CPI climbed 1.9% vs forecast 2%
  • Quarterly trimmed-mean inflation, the key core measure, rose 0.5% vs estimated 0.5%; annual trimmed mean advanced 1.9% vs forecast 1.8%
  • Quarterly weighted-median gauge, also a core measure, rose 0.5% vs estimated 0.5%, while annual gauge gained 2% vs forecast 1.9%
  • Yield on Dec. interbank cash rate futures drops to 1.56%, down from 1.78% percent at the end of January, as traders firm bets the RBA is on hold for the rest of 2018

Big Picture

The data reflect Governor Philip Lowe’s view that inflation will only gradually return to the midpoint of the Reserve Bank of Australia’s 2 percent to 3 percent target amid weak price growth that’s affecting much of the developed world. Policy makers are banking on a record-low cash rate to boost hiring and tighten the labor market, which should in time spur wage growth and inflation. Traders are pricing in only about a one-in-three chance of the RBA tightening at the end of this year.

Australian Inflation Stays Below Target, Signaling Rates on Hold

What Our Economists Say

Australia’s stable inflation in the first quarter defied upward pressures from a softer Aussie dollar and higher commodity prices. Inflation holding below the central bank’s target preserves spending power for households in support of the economic expansion. Bloomberg Economics still sees a rate hike by the Reserve Bank of Australia as an issue for 2019, not 2018.

-- Tamara Henderson, Bloomberg Economics

Other Details:

  • Biggest price rises in quarter were secondary education (+3.3%), gas and other household fuels (+6%) and pharmaceutical products (+5.6%)
  • Most significant falls this were international holiday travel and accommodation (-2.4%), audio, visual, and computing media and services (-6.1%) and furniture (-2.8%)
  • Tradable goods prices, which are impacted by the currency and other international factors, fell 0.4% on the quarter and 0.5% from a year earlier
  • Non-tradables, which are affected by domestic variables like utilities prices, rose 0.8% in the three months and 3.1% over the 12-month period

©2018 Bloomberg L.P.