Inflation spike takes ‘pressure off’ RBA

The Australian Bureau of Statistics (ABS) has released its consumer price index (CPI) for June quarter 2019, reporting a rise of 0.6 per cent in the three months ending 30 June and an increase of 1.6 per cent in annual terms.

The rise in the CPI index was above market expectations of a 0.5 per cent quarterly increase and a 1.5 per cent annual increase.

According to ING Economics, the CPI spike will “take the pressure off” the Reserve Bank of Australia’s (RBA) monetary policy board, but added that the trend remains below the central bank’s target range.

“[The] rise in the headline inflation rate to 1.6 per cent in 2Q19 represents a welcome directional shift given the steep drop to 1.3 per cent in 1Q19 but leaves a still substantial gulf to be filled to get inflation closer to the medium-term target,” the research group stated.

ING Economics stated that the quarterly pick-up in inflation, as well as recent fiscal policy changes, would prevent the central bank from easing monetary policy further in the short-term.

“In the short term, it means that the back-to-back cuts, with the most recent at this July’s meeting, are probably enough for now,” the research group stated.

“The government’s tax cut package passed Parliament this month too, which will deliver a tax rebate of $255 to $1,080 for many earners on tax returns now being filed. 

“That should provide a lift to spending and, hopefully, in time, employment, wages and inflation.”

However, ING Economics expects a further adjustment to the cash rate in the back end of 2019.

“We still have a further cut pencilled in for 4Q19,” the group noted.

“This isn’t a particularly strong conviction call, especially in terms of the timing. But recent dovish comments by [RBA] governor Philip Lowe indicate that the RBA may not have quite finished its easing yet.

“While we wait for the impact of the earlier monetary easing and the forthcoming tax rebates, we will retain a cautious outlook for policy, though it may be that we end up shifting this cut back into 2020, or even removing it entirely if the economic backdrop improves sufficiently.”

ING Economics concluded: “Markets are still fully pricing in a further rate cut by the year end, with a further cut of the cash rate to 0.5 per cent partly priced in. This sounds too much for us.”

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