From JP Morgan comes a good assessment of the state-of-play on interest rates:
The upside surprise on the core print, in particular, makes it extremely unlikely the RBA can trim the cash rate again in the near term, as we had been forecasting. The annual rates of headline and core inflation each have popped into the upper half of the RBA’s 2-3% target zone and, with the higher base and AUD sliding, now are less likely to threaten the bottom of the range.
That said, we still believe that the patchy performance of much of the domestic economy and the squeeze on national income from the falling terms of trade, mean that a rate cut later this year is more likely than a hike. But, in the near term, a move in either direction seems unlikely. Recent history tells us that forecasting an extended period of RBA inactivity usually turns out to be a mistake, but the most likely outcome from today’s inflation revelation is that RBA officials will sit back and wait to see how much of the bounce in inflation today is reversed in Q1, and how AUD behaves.
Indeed, much of the upside inflation surprise today came in the narrow space of fresh food prices, a weather-related pop that easily could be reversed in coming quarters. Trawling through the entrails of today’s data reveals little price inflation triggered by underlying domestic strength…
Also,in the absence of consistent evidence that activity outside mining was lifting (with the exception of resource export volumes and the leading indicators of home construction), the jobless rate still was likely to push up through 6% by mid-year. This combination, we believed, alongside benign inflation, would be enough for the RBA to squeeze out one more rate cut in the near term…
The bad news is that there are still are significant troubles in many trade-exposed sectors of the economy, and not just in manufacturing. Pricing power is weak, so many corporates will struggle to pass on higher wholesale prices as AUD falls.
