The debate over whether Australia’s central bank needs to implement a late-cycle monetary policy tightening is likely to be resolved with the Quarterly inflation data due to be released this weekand the currency will surely be dragged down by the consequences.
Consumer prices likely rose 3.8% in the second quarter from a year earlier, up from 3.6% in the prior period.economists had predicted ahead of Wednesday’s release. A key core measure, trimmed average inflation, which smooths out volatile prices, is forecast to remain at 4%. That is higher than the Reserve Bank’s latest forecast of 3.8% and suggests limited progress in controlling prices.
“If inflation is four points and does not increase, that begins to substantially affect its credibility in the fight against inflation.“said Stephen Miller, investment strategist at Gsfm.What that could mean is that long-term bond yields in Australia are struggling and certainly underperforming those in the US.”.
The Reserve Bank has raised rates less than its global peers in a bid to maintain job gains while worrying about the ability of heavily indebted households to weather the crisis. Persistent inflation, which suggests the RBA will fail to meet its goal of returning price gains to the 2%-3% target by the end of next yearwill likely require a further hike, and risks pushing a weak economy into recession.
The price report comes on the heels of stronger-than-expected job growth and solid retail saleswhile business survey indicators remain resilient. A partial gauge of prices rose more than expected for a third consecutive month in May, raising questions about whether policy is “sufficiently restrictive.”
The RBA has pledged to remain “vigilant” against rising price risks and the rate-setting council considered a rise in June before deciding to keep it at 4.35%. Although the odds are lower than they were earlier this month, money markets are still pricing in a one-in-five chance that the Reserve Bank will raise rates at its meeting on August 5-6.
“LInflation in Australia remains high relative to global peers“said Diana Mousina, deputy chief economist at AMP Ltd. She sees a quarterly result of more than 1% “would probably lead the Reserve Bank to raise ratess”, since it would be further from its inflation target.
Economists predict that Inflation rose 1% compared to the previous three months.
It won’t just be financial markets and policy makers who will be nervously awaiting the results.A cooling of inflation and the end of talks on raising interest rates would leave the door open for the centre-left government to call early elections this year. Faster price increases and the threat of further tightening would probably rule out that possibility.
Inflation last quarter was likely driven by rents and housing costs, as well as insurance and financial services. In addition, Fiscal spending remains strong, particularly at the state level, boosting demand and prices.
Australia’s policy caution has left the country near the end of the global cycleas the RBA is mulling hikes at a time when some peers are already easing rates. The Bank of Japan is an outlier, with Bloomberg Economics predicting a hike on Wednesday.
Meanwhile, the Bank of Canada has implemented consecutive rate cuts, while the European Central Bank has also lowered rates. China, Australia’s largest trading partner, has been cutting borrowing costs.
The Federal Reserve is likely to lay the groundwork for a change of course in September at its meeting this week.A particularly dovish Fed could warn the RBA against raising rates.
“With China easing and the risk of Fed and other developed market central banks taking action on the horizon“The RBA is very conscious of the need to tighten monetary policy when the pulse turns lower,” said Prashant Newnaha, senior rates strategist in Singapore at TD Securities.
Newnaha highlighted a recent sell-off in the Australian dollar and said that “CPI is unlikely to rescue the decline.”
The Australian dollar has plunged almost 2% against the greenback this monthamong the worst-performing major developed market currencies, as risk sentiment was hit by falling commodity prices and concerns about China’s economy. It is a turnaround for the currency, which had been a standout performer on bets about the RBA’s rate hike.
