UBS: CPI to pull donut, trigger early RBA cuts

Via the excellent George Tharenou at UBS:

Based on our proprietary survey, we cut our Q1 headline CPI forecast to 0.0% q/q (was 0.2%), a sharp slowing from Q4’s 0.5%. This would be the weakest in 3 years, & lower for only 3 quarters in the last 22 years. The key drag is fuel (-9.6%, -0.28%pts), but the UBS Evidence Lab Grocery Tracker has food up 0.4%. Overall headline likely slowed to a >2-year low 1.3% y/y (after 1.8%), under the RBA’s 2-3% target in 16 of 18 quarters, but ~tracking the RBA’s implied profile behind their 1¼% forecast for Q2-19. We also cut our 2019 CPI forecast to 1.5% y/y, further below consensus at 1.8%. Since 2014, inflation has undershot the RBA’s 2.5% mid-point by a cumulative 500bps, & to return to ‘path’ would need to ~double its recent trend & rise by 3.2% y/y until 2025.

We also revise down our trimmed mean forecast to 0.4% q/q (was 0.5%), after Q4’s 0.4% (albeit our survey suggests downside risk of 0.3%). The y/y drops to 1.6% (after 1.8%), the lowest since 2016, & 2nd lowest on record. This marks 13 quarters below the RBA target, & a bit below the profile implied in their 1¾% forecast for Q2. Indeed, after a per-capita recession in 2H-18, the RBA will likely revise down GDP by 70bp-100bs, & our forecast adds to the case for an explicit easing bias in May.

And the RBA:

Implications for rates: Pay RBA May meeting and receive July in OIS At its meeting in May, the RBA is likely to have to downgrade its forecasts for GDP; which should prompt the Bank to adopt an explicit easing bias. While we continue to expect the RBA to cut the policy rate twice this year; we think that risks remain skewed towards a later move, in line with our AU economists’ call for two 25 bps of cuts in July and August. This argues for select AUD OIS flatteners, such as pay RBA May-19 meeting date OIS vs receive July-19.

All but done now.

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  1. – I am sorry to say but inflation doesn’t drive interest rates. Interest rates have been falling since 1990 are signaling rising income inequality (Source; Michael Pettis).
    – Yes, the RBA cutting rates is as sure as day follows night.

  2. Yep inflation is a big GONE. But the RBA doesn’t care about inflation. Read their statement. They don’t talk about it at all in their domestic economy write up in the Minutes and they barely mention it at all in the entire document…

    RBA only care about unemployment (as if they know what the NAIRU is- LOL)…

  3. But didnt the rba minutes just say that they will be looking at unemployment?
    So i am wondering if that statement was made to set exprctations of what they will be “looking through “, i.e. lpe inflation numbers might not trigger squat. That’d be what you conclude reading their cue.

    And given the unemployment numbers are totally rigged now we will be totally knee deep in recession before the needle on the ir moves. Will be too late because these numbers have been made to be resilient to any actual activity for political reasons.

    • Jumping jack flash

      “And given the unemployment numbers are totally rigged now we will be totally knee deep in recession before the needle on the ir moves.”

      Has anyone actually calculated the equivalent of 10% unemployment under the Keating unemployment measure to the Howard system? H5.2% = K8% perhaps? Maybe we’re there already? Who knows?

    • Jumping jack flash


      The main thing the trillions of nonproductive debt dollars was used to inflate is conveniently ignored.

    • Yup, exclude all the items exhibiting high price growth from your core calculation and voila! inflation tamed. Magic, innit?

      Govt statisticians and RBA staff have had to be treated for severe abdominal pains from laughing so much at the terminally stupid public they’ve been duping for so many decades — incurious Economists have swallowed this too.

      Oh well, we’ll get what we deserve eventually.

  4. Rate cuts not a done deal at all. China credit easing is de facto easing for Australia and will take pressure off RBA to cut as demand for our exports marches higher and national income rises. Sure that leaves AUD higher but RBA doesn’t seem too concerned on that front given their occupation with employment levels.

    • Yup, the only thing that might do it though is weak consumer spending. Either way, rate cuts are coming at some point.

      The US economy is weakening and it’s only a matter of time before they start marching rates lower again. We’ll follow them if we haven’t already started.

  5. Jumping jack flash

    Interest rates can only control a cargo-cult economy where negative money (nonproductive debt) is added in the hope that it magically produces positive money (proceeds of actual production and sales). The problem is that the nonproductive debt requires additional money to repay for the interest (at bare minimum) and that must be stolen from the productive part of the economy.