Inflation reading leaves door open for cash rate cut but decision “the toss of a coin”: CommSec

The June quarter inflation data has provided no certainty of the RBA cutting the cash rate on August 6, but most economists seem to think the odds of a cut are pretty good.

For those who missed it, headline inflation rose 0.4% over the June quarter – more or less in line with forecasts – to leave inflation up 2.4% on an annualised basis. 

This leave the inflation rate well within the RBA’s target band of 2% to 3% but as economists point out, the RBA is not all that interested in the headline rate, but in the underlying or core inflation rate, which strips out volatile components of the consumer price index and gives a more accurate, seasonally adjusted reading. 

HSBC chief economist Paul Bloxham says the RBA's preferred underlying measure, the trimmed mean, was up 0.5% in the quarter (in line with the market and HSBC) with the year-on-year rate up 2.2%, slightly above the 2.1% expected by the market. 

He tips a rate cut in August due to the local economy growing below trend and the RBA "still seemingly looking for the Australian dollar to fall a bit further". 

Other economists have a quarterly underlying inflation reading of 0.6% putting inflation up between 2.4% and 2.5% through the year. 

The bottom line appears to be that inflation is well contained and within the 2% to 3% target band providing scope for a rate cut if needed. 

Bloxham’s confidence aside, if borrowers want certainty on the August 6 decision, they may have to wait until 2.30pm on August 6, when the official announcement will be made. 

CommSec economist Savanth Sebastian calls the decision a “coin toss” noting that “financial markets see a 56% chance of a rate cut”. 

CommSec has pencilled in a rate cut – not inked in, mind you - with Sebastian saying the latest data “keeps the door open to a rate cut should it become necessary”. 

Westpac economist Justin Smirk observers that the June inflation number “should not stand in the way of an RBA cut” but this requires that the RBA agrees with the banks’s view “that the real economy is in need of further stimulus”. 

“With the Bank now likely to cut its growth forecast in 2014 to 2.75% (from 3% with Westpac at 2.5%) recognition that growth in the next year will be below trend challenges a central bank to provide more stimulus if allowed by the outlook for inflation - this report does not indicate that inflation is a constraint,” he says. 

AMP Capital chief economist Shane Oliver appears somewhat more certain of a rate cut in August noting that while “tradable inflation rose 0.3% in the June quarter possibly reflecting the recent fall in the Australian dollar, non-tradeable inflation only rose 0.5%” 

“Moreover the lack of pricing power in the economy was highlighted by the just 1.5% annual increase in the price of goods and services in the market sector of the economy (after excluding volatile items).

“The bottom line is that inflation is comfortably contained in the RBA's 2% to 3% inflation target range and we view the benign outcome as clearing the way for the RBA to cut interest rates again next month. 

However, ANZ is sticking with its November timeframe for the next rate cut with Riki Polygenis, senior economist at the bank, noting that while the RBA would not be overly concerned with the June quarter figures, “they do reduce the probability of an August rate cut at the margin”. 

“We still envisage a relatively subdued inflation outlook given the generally weak demand environment and slowing unit labour costs growth. 

“In addition, inflation is a lagging indicator, and more timely indicators of demand will be receiving just as much focus. 

“The possibility of a late August election is also a complicating factor."

ANZ continue to expect a further rate cut some time this year (currently pencilled in for November).