Bloomberg weighs in on the Aussie rates debate today:
Debate over whether Australia’s central bank needs to deliver a late-cycle policy tightening is likely to be resolved with the release of quarterly inflation data this week — and the currency is set to be swept up in the fallout.
Headline consumer prices probably advanced 3.8% in the second quarter from a year earlier, from 3.6% in the prior period, economists predicted ahead of Wednesday’s release. A key core measure, trimmed mean inflation, which smooths out volatile prices, is seen holding at 4%. That’s above the Reserve Bank’s latest forecast of 3.8% and suggests limited progress in reining in prices.
“If inflation is four-point something and they don’t raise, it starts to substantially bite into their inflation-fighting credibility,” said Stephen Miller, an investment strategist at GSFM. “What that might mean is the longer tenor bond yields in Australia struggle and certainly underperform the US.”
Rate futures are predicting only a 78% chance of a rate hike. Arguably, it should be lower.
There are two reasons.
First, Aussie inflation is going to crash in the next few months as energy subsidies kick in.
The RBA has made the point that it will focus on Trimmed Mean which will ignore these subsidies.
But why would they? They are not temporary. The failure of politicians to address the energy crisis ensures their permanence.
Waiting a year to check in on the venality of politicians is idiotic for the central bank, as it will soon realise.
Second, the base effects of Australian inflation are positive for the next three quarters:
- Sep QTR 1.2%
- Dec QTR 0.6%
- Mar QTR 1%
With energy subsidies and the ongoing per capita recession, year-on year headline CPI is going to crash back to 3% by year-end.
Is the central bank going to hike into this optic?
If you know this is coming, why wouldn’t you wait and see rather than panic like an AFR or Bloomberg journo with no future?
