No 'inflation nutters' here: HSBC's Paul Bloxham

No 'inflation nutters' here: HSBC's Paul Bloxham
No 'inflation nutters' here: HSBC's Paul Bloxham

GUEST OBSERVER

The RBA kept its cash rate steady at 1.50 percent, as expected.

Although underlying inflation is running at 1.5 percent y-o-y, which is below the RBA's 2-3 percent target band, the central bank noted that 'the September quarter inflation data were broadly as expected' and that 'inflation is expected to pick up gradually over the next two years'.

It's clear that although inflation is still below target the RBA is making use of the 'flexible' and 'medium-term' nature of the inflation targeting regime.

In short, the RBA decision-makers are not 'inflation nutters'. They backed this up with (lack of) action. Overall, the statement was little changed from last month. Somewhat surprisingly, there was no specific reference to the recent sharp rise in coal prices. We expect the RBA to be on hold at 1.50 percent in coming quarters.

Facts

The RBA held its cash rate steady at 1.50 percent, as expected by 22 of 28 economists in the Bloomberg survey, including HSBC. Just prior to the decision the market was pricing a 5 percent chance of a 25bp cut.

Implications

The RBA made use of the 'flexible' nature of its inflation targeting regime by choosing not to cut the cash rate, even though underlying inflation remains clearly below the bottom edge of its 2-3 percent target band (in both q-o-q and y-o-y terms).

Harking back to a famous comment by former Bank of England Governor, Mervyn King, in 1997; there are no 'inflation nutters' here. RBA Governor Phil Lowe recently repeated this view at a parliamentary testimony and today the RBA backed it up with (lack of) action.

The accompanying statement was very similar to last month, with only a few small tweaks to the text. On the exchange rate, they repeated that 'an appreciating exchange rate could complicate' the rebalancing of growth.

On the housing market, the statement re-iterated that 'the rate of increase in housing prices is also lower than it was a year ago', but also acknowledged that 'prices in some markets have been rising briskly over the past few months'.

Somewhat surprisingly, there was no specific reference to the recent sharp rise in coal prices. Keep in mind that coking coal prices are up 210 percent since May and thermal coal prices are 116 percent higher (iron ore prices are also up 63 percent since January).

To the extent that these price rises are sustained, this has the capacity to change the Australian growth story significantly, in our view. In not mentioning coal prices today, the RBA appears to be taking a (characteristically) cautious approach to not shifting the narrative until it is completely sure that the story has changed.

We will be looking out for more on commodity prices and the likely impact on growth and inflation in the RBA's detailed quarterly official statement due out on Friday 4 November. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 

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