And here it is, not that is was ever in doubt:
* Today’s Australian CPI numbers surprised significantly to the downside, paving the way for a cash rate cut
* The trimmed mean and weighted median both rose by a smaller-than-expected 0.3% q-o-q, well below the 0.5% expected by the market, to 2.2% y-o-y on average
* Lower-than-expected inflation means we now expect the RBA to cut by 25bp, probably next week (we previously had the RBA on hold)Low inflation is likely to force the RBA’s hand
The RBA has been reluctant to consider cutting its cash rate any further. Business conditions are improving, employment growth is picking up, and it remains concerned about rising risks in the property market.However, today’s much lower-than-expected underlying inflation numbers are likely to force the RBA’s hand. The trimmed mean and weighted median both printed at a low q-o-q rate of 0.3% (well below the market’s call for 0.5% q-o-q) (Chart 1). On a y-o-y basis, the trimmed mean was running at 2.1% (the market had 2.4%), while the weighted median was 2.2% y-o-y (the market had 2.5%). On a six-month annualised basis, the underlying measures have fallen below the bottom edge of the target band (Chart 2). The numbers are likely to have surprised the RBA to the downside. The last set of published forecasts from the RBA showed that it expected underlying inflation to pick up to 2.5% y-o-y by Q4. This now seems unlikely.
The recent lift in mortgage rates by Australia’s four major banks, in response to higher regulatory capital requirements, has also tightened local financial conditions. The average lift in the variable mortgage rate was 17.5bp. This, alone, was unlikely to see the RBA consider cutting its cash rate, given concerns about rising risks in the property market. However, when combined with the downside surprise to inflation, the RBA now has multiple reasons to consider a cut.
Clearly, tomorrow morning’s Federal Reserve meeting will be closely watched and could have a bearing on the RBA’s decision. Fundamentally, however, it will remain hard for the RBA to argue against a cut when underlying inflation has fallen as much as it has and is now below the target band over the past six months.
We now expect the RBA to cut its cash rate by a further 25bp in Q4 (previously we expected the RBA to remain on hold), with a cut at the November meeting most likely.
