‘Messy’ CPI result could stay RBA’s hand

Fresh figures from the Australian Bureau of Statistics revealed yesterday that the headline CPI for the third quarter of 2016 was 0.7 per cent, or 1.3 per cent year-on-year.

AMP Capital chief economist Shane Oliver said the result is “messy” and casts doubt on whether the RBA would choose to make a further cut to the interest rate next Tuesday.

“On the one hand the underlying numbers are low, but they’re not decisively low perhaps, and they come at a time when we’ve seen strength in commodity prices and economic growth generally, that might cause the RBA to hold,” Mr Oliver explained to Mortgage Business.

He elaborated that the headline inflation number of 0.7 per cent (1.3 per cent year-on-year) was “a little bit higher” than most expectations (which had forecast a year-on-year rate of 1.1 per cent), driven by rises for “volatile items” such as fruit (+19.5 per cent q/q) and vegetables (+5.9 per cent q/q).

“The underlying measures of inflation remained reasonably low, averaging around 0.3 per cent or 1.5 per cent for the year,” he added. “So I think it’s a fairly difficult call for the RBA.”

“On balance I’d probably lean to the RBA [keeping rates] on hold in November because the underlying rates are very low. Other areas of the economy are reasonably solid, commodity prices have been rising, so I’d lean to the view that they’d look at their numbers as being consistent with inflation. They’d wait and see,” he said.

However, Mr Oliver noted that the Australian dollar is higher than the RBA would prefer it to be and it will therefore be a “close call” for the RBA on Tuesday.

“Inflation is, on an underlying basis, incredibly low and there’s still a lot of inflationary pressure working its way through the economy, and of course the Aussie dollar is higher than they’d prefer it to be,” he said.

Mr Oliver remained of the view that if the Reserve Bank were to cut the official cost of borrowing in November, it would likely be the last.

“If they do cut in November, then that would probably be the bottom of the cycle,” he concluded.

In its Australian Economics Quick Reaction, ANZ agreed with Mr Oliver, saying that although the headline CPI was “a little stronger than expected”, the underlying measures of inflation “remain soft”.

Jo Masters, ANZ’s senior economist, said: “The RBA would likely be disquieted by the soft tone for underlying inflation. On this data, it is too early to conclude that disinflationary pressures are abating or even stabilising …

“[We] are likely to see the RBA downgrade its inflation profile slightly ... That said, we doubt the RBA would mechanically respond by cutting rates but rather would wait and closely monitor developments in inflation and wages as well as housing and the labour market over the coming months.”

The ANZ report concluded: “[This] data slightly complicates the monetary policy outlook, but we doubt the RBA would see any urgency for a policy response … we think that inflationary pressures are stabilising and that the RBA will remain on hold with the cash rate.”

[Related: RBA ‘shouldn’t just rely on low interest rates’ to assist economy]