Weak inflation data to test RBA resolve

Analysts expect lacklustre first-quarter inflation data to further test the Reserve Bank’s resolve as domestic demand softens, though an immediate rate cut remains unlikely after strong job figures last week.

Wednesday’s March quarter inflation figures loom as the major economic focus of the holiday-shortened week, with the market anticipating headline inflation to rise just 0.2 per cent for the quarter, slower than the 0.5 per cent in the December quarter.

The consensus is for the consumer price index to sag to 1.5 per cent for the March quarter, down from 1.8 per cent in the December quarter, and below the Reserve Bank of Australia’s two per cent to three per cent inflation target.

But Moody’s Analytics says a continued trend of disappointing inflation will not be enough to force the RBA to cut the cash rate from a record low 1.5 per cent, particularly after last week’s uptick in full-time employment.

“The April monetary policy minutes show that the RBA can see a case being made for interest rate cuts, as financial markets expect, over the next 12 months if there is consistently weak inflation and the unemployment rate consistently trends higher,” Moody’s said in a note on Tuesday.

“While inflation is soft, the labour market is looking resilient, so current conditions do not warrant such action.”

The NAB markets research team agreed that underwhelming inflation figures would only fulfil one half of the RBA’s two stated preconditions for lowering rates.

NAB cited the impact of February’s flooding in Queensland on fruit and vegetable prices as the key uncertainty for Q1 CPI.

“While there were sharp price rises, some substitution by consumers within the fruit (and vegetable) category likely dampened the measured impact on the CPI,” NAB said.

Meanwhile, JP Morgan says car fuel will be the main drag on inflation, predicting a 10 per cent quarter-on-quarter fall in petrol prices expected to strip 0.3 percentage points from the headline CPI.

“While fuel dynamics loom large, the weakness in Q1 is broader than just an energy story, with inflation across various administered price components also likely to undershoot seasonal norms,” JP Morgan said in a note.

“This trend is most notable in electricity prices, with providers in Victoria pushing through price discounts announced last year.”

The figures will be released by the Australian Bureau of Statistics at 1130 AEST on Wednesday.


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