Benign inflation reading sets scene for August rate cut: Shane Oliver

A “benign” inflation reading for the second quarter of the year on Wednesday should see the RBA cut the cash rate to 2.5% on August 6, says AMP Capital chief economist, Shane Oliver.

“While solid gains are expected in prices for fresh fruit and vegetables and health, this is likely to have been offset by continuing poor pricing power as clearly evident in the NAB’s business survey resulting in a rise in the CPI of 0.5% in the quarter and 2.5% year on year,” says Oliver in his latest weekly and economic market update.

This would leave inflation at the mid-point of the RBA’s target band of between 2% and 3% providing scope for another rate cut to support demand for the non-mining sectors of the economy.

“The average of the underlying inflation measures are also expected to have increased by 0.5% in the quarter resulting in 2.3% year on year,” says Oliver.

“With both measures running around or just below the mid-point of the RBA's inflation target, inflation is not a barrier to further monetary easing."

Oliver expects a pick in the residential building sector following last week’s data releases showing a fall in housing starts and imports.

“The rising trend in building approvals suggest that the fall in housing starts will be short lived,” he says.

Taking a more holistic look at the markets, Oliver expects share markets to trend up broadly despite the potential for more volatility from such factors as the US Federal tapering its monetary stimulus policy, approaching US debt ceiling negotiations, growth in China and the growth slowdown in Australia.

He says valuations are still reasonable; “monetary conditions are likely to remain very easy with interest rate hikes a long way off in all developed countries and rates still likely to fall further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead”.

“So by year end we see further upside in global and Australian shares,” he says.