AUD: Low inflation unlikely to trigger RBA rate cut – HSBC

FXStreet (Delhi) – Research Team at HSBC, suggests that Australia’s underlying inflation this low is usually a recipe for an RBA cash rate cut but not this time: or at least not yet.

Key Quotes

“Late last year, the RBA Governor, Glenn Stevens, made it clear that the RBA was prepared to be more tolerant of low inflation, for a number of reasons, including: that low inflation is a global force, so the RBA may not be able to do much about it; that the RBA already has its cash rate at a record low of 2.00%; and, that the RBA sees risks to financial stability if it cuts further and were to drive an additional lift in housing prices.

Importantly, for the moment, the RBA can afford to tolerate low inflation because the jobs and activity indicators have been lifting. The unemployment rate fell to a two-year low of 5.8% in December and a key survey also shows that business conditions have been around 7-year highs recently (albeit falling back a little in the December print). 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.

However, as today’s CPI numbers confirm, underlying inflation is no constraint on the RBA’s scope to cut rates, if they deem it necessary and useful for supporting growth. At the same time, we expect growth to remain a bit below trend this year and recent global developments, particularly in China, suggest the risks to the growth outlook are tilted to the downside. A fourth year of below trend growth is expected to continue to weigh on the outlook for Australian inflation. The recent fall in oil prices is also a clear downside risk to the inflation outlook. In short, we do not see enough growth momentum to get inflation back to the mid-point of the target band this year.

What will trigger the RBA to move? In our view, some pullback from the strong pace of jobs growth or the high level of business conditions, combined with a continued cooling of the Sydney and Melbourne housing markets may be enough to convince the RBA that another cut may be needed. Of course, a further fall in the AUD, perhaps to US60-65 cents, could do the work for them, but the currency does seem to be quite sticky around the US70 cent level.”

Research Team at HSBC, suggests that Australia’s underlying inflation this low is usually a recipe for an RBA cash rate cut but not this time: or at least not yet.

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