RBA governor Glenn Stevens. Photo: Luis AscuiInflation slightly higher than expected
Inflation is very low. It will remain low for the rest of the year.
But the Reserve Bank board will not be rushing to cut the official cash rate when it meets on Tuesday. A rate cut may be on the cards by the middle of the year if conditions deteriorate considerably.
That’s the view of economists anyway.
The Bureau of Statistics has just released its latest inflation figures, and annual underlying inflation is running at 2.1 per cent, near the bottom of the Reserve Bank’s target range of 2 to 3 per cent.
It is being hampered by petrol prices, which fell 5.7 per cent in the December quarter, and falls in fruit prices (down 2.6 per cent) and telecom equipment and services prices (down 2.4 per cent).
But it is being supported by tobacco prices, which jumped 7.4 per cent in the December quarter after an increase in the federal excise; domestic holiday travel and accommodation, which climbed 5.9 per cent; and international holiday travel, which rose 2.4 per cent.
Those price rises are enough to make inflation slightly higher than expected. They also mean the RBA won’t be hugely worried by inflation at the moment.
As HSBC’s chief economist Paul Bloxham has pointed out, underlying inflation this low is usually a recipe for an RBA cash rate cut.
But it isn’t this time (at least not yet) for a couple of reasons.
Firstly, RBA governor Glenn Stevens said last year he was going to be more tolerant of low inflation because it is a global force that he can’t do much about. And since the cash rate is already at a record low of 2 per cent, any rate cut will not be as effective as it would be if rates were higher.
Secondly, the jobs market and business activity indicators have been lifting recently. Australia’s official unemployment rate fell to a two-year low of 5.8 per cent in December, and the RBA board will be more concerned about the pace of jobs growth than inflation.
“While the labour market and activity surveys are still holding up, the RBA is unlikely to cut rates. This pretty much rules out a cut next week,” Mr Bloxham said on Wednesday.
Mr Stevens knows economic growth is below trend, and that it is likely to remain below trend for the rest of the year. He will also be mindful of recent global developments, particularly in China, which suggest global growth will be soft through the year.
But he should be happy enough with conditions in the labour market to hold fire on rates for the moment.
It’s a view shared by economists at the big banks.
“We believe the low inflation outcomes will give the RBA room to maintain their conditional easing bias, but they are unlikely to act on it unless there are signs of deterioration in the jobs market, and the improvement in the jobs data is remarkable,” Commonwealth Bank senior economist Michael Workman said in a note to clients.
“There have been an extraordinary 300,000 extra jobs added over the past year and the unemployment rate is at 5.8 per cent.”
So what could trigger a rate cut? If the pace of employment growth slows considerably, or if business conditions weaken seriously, or if house prices in Sydney and Melbourne slow enough. But the RBA may not need to cut rates again if Australia’s dollar falls towards US60-65¢ because it will do the work for them.
It remains a balancing act for the Reserve Bank’s board.
Feeding into this story is Deloitte Access Economics’ latest Investment Monitor, released overnight.
It has tracked the number and value of local investment projects in the pipeline, and shows the value of planned projects in its database contracted in the December quarter by $10.3 billion. The value of planned projects is now $37 billion below the value recorded this time last year.
It also shows the value of definite projects in its database (those under construction or committed) has fallen by just over $27 billion over the quarter, equivalent to a 6.7 per cent fall. That takes the value of definite projects to its lowest level in more than four years.
Overall, total recorded value of projects in its database is $776.9 billion. That represents a 4.6 per cent decrease from the previous quarter, and is 6.8 per cent below the level recorded in December 2014.
The effects of the drop off in mining-related engineering project activity is being compounded by falls in global commodity prices, which keep delivering an unwelcome income shock to our economy.
Thankfully, the dollar falling to around US68¢ has helped our tourism and international education sectors, and record-low interest rates have boosted the finance sector, while housing construction and retail remain relatively strong, despite sentiment in the housing sector waning somewhat.
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