FXStreet (DelhI) – Research Team at HSBC, notes that the Australia’s CPI inflation has surprised on the downside, with the RBA’s preferred underlying measures running at their lowest rate since 1997 in quarterly terms in the third quarter.
Key Quotes
“Over the past year, the underlying measures have averaged 2.2%. Given the very weak third quarter result, the y-o-y rate of underlying inflation is likely to skirt the bottom edge of the RBA’s 2-3% target band in coming quarters.
“The AUD had also stayed stubbornly high, weighing on inflation. Although the AUD has now fallen and is lifting imported goods prices, the compression of local retail margins has kept CPI inflation weak. The domestic economy has also been operating with spare capacity for some time, with the unemployment rate well above its full employment level. This has dampened wages growth and kept domestic prices pressures at bay.”
“At the same time, the timely indicators show that growth is lifting, as the economy rebalances away from mining-led growth towards the housing and services sectors. Business conditions and jobs growth have picked up. History suggests that this should generate some wage pressures and domestic inflation over time, if it persists.”
“Although low inflation gives the RBA scope to cut rates again, the recent lift in business conditions and jobs growth has kept them on hold for the moment. Another low CPI print in late January could see the RBA cut to keep inflation on target.”
“On the other hand, if the ‘green shoots’ persist, then the RBA may be patient enough to wait for inflation to gradually lift. Upcoming domestic data as well as the Fed’s December decision and its implications for the AUD will be important. With inflation set to stay low for some time, the chance of a rate rise in 2016 appears to be very low.”
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