Inflation won’t sway the RBA on rates

03_Inflation won_t sway the RBA on rates

By Lucy Hughes Jones

(Australian Associated Press)

The Reserve Bank can ignore inflation when weighing up a rate cut next week.

The price of Australian consumer goods and services rose 0.4 per cent in the three months to December, marginally beating expectations.

That put the annual rate of inflation at 1.7 per cent, while core inflation, which is closely watched by the RBA, just scraped in at the bottom of the central bank’s two to three per cent target band.

Markets are currently pricing in a six per cent chance of a cut at the Reserve Bank’s February meeting, down from around 19 per cent before the inflation numbers came out.

CommSec economist Savanth Sebastian said inflation is not a threat to the domestic economy, and is neither a constraint nor a catalyst for monetary policy action.

This means the Reserve Bank can comfortably keep rates at historically low levels throughout 2016.

“Slow growth in wages (is) unlikely to result in a change to the domestic inflation landscape,” Mr Sebastian said.

The Aussie dollar’s slide is starting to lift import prices, though this is being cushioned by the impact of sliding oil prices on petrol, he said.

A 5.7 per cent slump in fuel prices in the December quarter was offset by a 7.4 per cent surge in tobacco and a 5.9 per cent rise for domestic holiday travel and accommodation.

Mr Sebastian said policy makers will focus more attention on the labour market, shifts in the Aussie dollar and retail activity.

Underlying inflation, which strips out volatile price movements, was 2.0 per cent over the year after a quarterly rise of 0.6 per cent.

That’s usually a recipe for a cash rate cut, but it won’t be this time, or at least not yet, HSBC chief economist Paul Bloxham said.

The RBA can afford to tolerate low inflation because the jobs market and business conditions have been improving, he said.

And because low inflation is a global force, cutting rates may not be fully effective, while further easing could drive an additional lift in housing prices, risking heightened financial instability.

“With inflation at the bottom edge of the target band and growth unlikely to be above trend this year, we think another cut is likely around mid-year,” Mr Bloxham said.


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