28 Oct 2015
Aus inflation surprise lowers RBA's hurdle rate - UBS
FXStreet (Córdoba) - Australian 3Q inflation was unquestionably weak, with core inflation producing one of its lowest readings in nearly 20 years. This flags downside risks to the Reserve Bank of Australia's (RBA) own economic forecasts, which will be clearly under review ahead of the 3 November meeting, according to the UBS analyst team.
Key Quotes
“We now see November as a live meeting, although we expect the RBA to engage in some groundwork first; on 16 October we revised our cash rate base case to 1.75% (from 2%), expecting either a rate cut in November or December. Ultimately, in changing our view, we judged that financial conditions were tightening again. While this is undesirable to the RBA, it might signal less heat in the housing market that would provide some scope for action, if needed. We believe the inflation print actually lowers the RBA's hurdle rate”.
“On a seasonally adjusted basis, CPI came in at just 0.1% q/q to total 1.5% y/y. The RBA's trimmed mean and weighted median were also soft at 0.3% q/q and 2.2% y/y. With Australia's trade-weighted index down by 10% this year, the lack of tradable inflation has surprised us. Weak non-tradables merely reinforce our view of persistently weak household income growth. Because 4Q is seasonally weaker historically, we now anticipate underlying inflation falling below the 2-3% target band, which, if it occurred, would mark its lowest level since the late 1990s”.
“We reiterate our bearish call on the Australian dollar of 0.65 versus the US dollar over the next 12 months”.
Key Quotes
“We now see November as a live meeting, although we expect the RBA to engage in some groundwork first; on 16 October we revised our cash rate base case to 1.75% (from 2%), expecting either a rate cut in November or December. Ultimately, in changing our view, we judged that financial conditions were tightening again. While this is undesirable to the RBA, it might signal less heat in the housing market that would provide some scope for action, if needed. We believe the inflation print actually lowers the RBA's hurdle rate”.
“On a seasonally adjusted basis, CPI came in at just 0.1% q/q to total 1.5% y/y. The RBA's trimmed mean and weighted median were also soft at 0.3% q/q and 2.2% y/y. With Australia's trade-weighted index down by 10% this year, the lack of tradable inflation has surprised us. Weak non-tradables merely reinforce our view of persistently weak household income growth. Because 4Q is seasonally weaker historically, we now anticipate underlying inflation falling below the 2-3% target band, which, if it occurred, would mark its lowest level since the late 1990s”.
“We reiterate our bearish call on the Australian dollar of 0.65 versus the US dollar over the next 12 months”.