From Bloxo today comes the endlessly deferred rate hike, originally planned for H2 2014:
We now expect next week’s Q4 CPI inflation (due on 28 January) to print at 1.7% y-o-y (previously 1.9%); we revise down our 2015 CPI forecast to 1.9% (previously 2.4%)
* Underlying inflation is likely to be less affected, with the trimmed mean still expected to be 2.3% y-o-y in Q4; we now see the trimmed mean at 2.4% in 2015 (previously 2.5%)
* Given lower inflation, we now expect the RBA to be on hold for all of 2015, at 2.50%, with the next hike in Q1 2016 (previously Q4 2015)
Low inflation to allow a longer rates pause
As a devoted inflation-targeting central bank, next week’s Q4 CPI will be the highlight of the quarter for the RBA as it weighs up its views ahead of the 3 February board meeting.
Headline CPI inflation is expected to be low; however, as always, the RBA is expected to focus on the underlying measures to gauge the pulse of inflation. Indeed, given the sharp fall in oil prices and the effect on petrol prices, we are revising down our forecast for the Q4 headline CPI print to 1.7% y-o-y (previously 1.9%), implying a q-o-q print of just 0.2%. However, we still expect the trimmed mean to print at 0.6% q-o-q (2.3% y-o-y).
An even lower Q4 print could raise the chance of a near-term rate cut. A print of 0.4% q-o-q or below on the trimmed mean would make a cut more likely, although we see only a small chance of such a low underlying inflation print, for a number of reasons. First, both our models suggest an underlying print of 0.5-0.6%; second, the fall in petrol prices should be trimmed out of the measure; and third, retail demand appears to have held up in Q4.
More broadly, we are revising down our full-year view on inflation, given a lower working assumption for the oil price. Our working assumption is now for oil prices at USD55/barrel this year (previously USD79/barrel). A 30% lower oil price is expected to push petrol prices down by 10-15%. Given that petrol accounts for 3.5% of the consumer basket, this should knock 0.5ppts off headline CPI inflation. With this in mind, we are revising down our headline CPI forecast to 1.9% for 2015 (previously 2.4%). We expect a smaller effect on the trimmed mean, which we see at 2.4% in 2015 (previously 2.5%).
We see the lower oil price as a net upside risk for growth, but we are maintaining our central case for GDP growth of 2.8% in 2015.
Finally, we now expect the RBA to be on hold for 2015, with rates rising in 2016.
Cuts, boyeee.
