Mortgage holders are breathing a sigh of relief after the Australian Bureau of Statistics (ABS) reported benign inflation figures, reducing the urgency for another Reserve Bank rate hike.
The inflation data released by the ABS today has made the RBA’s decision on interest rates even more difficult. Prior to the release of today’s inflation data, interest rate futures traders were rating the possibility of a rate hike at the next RBA meeting, due to be held on Melbourne Cup Day, at around 60 percent.
The ABS reported September quarter inflation figures came in at 0.7 percent for the quarter and 2.8 percent for the year, below economists’ expectations and below the 3.1 percent rise for the June quarter.
The Reserve Bank’s preferred trimmed mean and weighted median measures of inflation came in at 0.6 and 0.5 percent for the three months to September, virtually unchanged from the 0.5 percent result for both last quarter.
Interestingly the inflation drivers for the quarter came from increases in the price of utilities and charges, with water and sewerage up 12.8%, electricity up 6% and property rates and charges up 6.2%. These increases were offset by significant falls in vegetable prices down 5.4%, the cost of pharmaceuticals down 3.9%, the cost of fuel down 3.7% and falls in the prices for audio, visual and computing equipment down 2.7%.
At its last meeting the RBA surprised economists and investors by leaving the cash rate on hold at 4.5 percent. The meeting minutes revealed the decision was ”finely balanced” and that the RBA needed more information about price pressures in the economy.
The figure that the RBA uses for its interest rate decision is the underlying inflation, which is now running between 2.3 and 2.5 per cent for the year to September, in the middle of RBA’s target band. The underlying inflation reading is now the lowest in over five years and removes the urgency of another RBA rate hike.
The rising Aussie dollar has helped moderate inflation and it has gained around 13 percent in the September quarter against the US dollar. This has resulted in lower prices for consumers and cheaper capital equipment for businesses.
However at next week’s meeting the RBA still needs to consider:
• Whether a rate hike in November would be more effective than waiting til December, as much of the Christmas and business planned spending is allocated in the weeks before the RBA December meeting.
• The likelihood of the strong Australian dollar holding near parity, for an extended period.
• If there are signs of excessive wage rises as the job market tightens.
The Trade
Interest rate futures traders are now rating the possibility of a rate hike at the next RBA meeting at around 30 percent. The next meeting is due to be held on Tuesday (Melbourne Cup Day).
Retailers and mortgage holders will benefit if the RBA interest rate hike is delayed, which will in turn help the Consumer Discretionary sector. The Banking sector will be hurt as banks have said that the margins for their cost of money are already tight.
There are a number of external influences on the Aussie economy. In the US GDP data is due out later this week and the US Federal FOMC meeting is scheduled for next week, and investors have already factored in a new round of stimulus spending (QE2).
The big surprise in the CPI figures was the very subdued underlying inflation figures which came in at the middle of RBA’s target band. The underlying inflation reading is now the lowest in over five years and removes the urgency of another RBA rate hike. However, we expect that if the RBA is going to increase rates before Christmas then it will be more effective if done at the November meeting.
