In the groove inflation rate means RBA on hold

Wed, 23 Jul 2014  |  

It seems the markets and a gaggle of commentators are getting a little excited about the June quarter CPI which showed headline inflation at 3.0 per cent annual terms and the underlying inflation measure at 2.8 per cent. At face vale, both are near or at the top of the RBA 2 to 3 per cent target band and without any further analysis would suggest there is something of an inflation issue in the economy.

But when one bothers to dig into the numbers, it is clear that inflation is probably slowing and one-offs have been pushing those annual figures higher.

In six monthly annualised terms, the path for underlying inflation over the past two years has been:

H1 2014: 2.5%
H2 2013: 3.1%
H1 2013: 2.1%
H2 2012: 2.7%

There was a bit of a lift in the second half of 2013, which now appears to be a quirk, perhaps influenced by the AUD dipping through much of 2013 and adding to some import prices. Obviously that mini-spike will drop out over the next two quarters which suggests a gentle pull-back in the annual inflation rate is likely by year end.

The August RBA Board meeting is likely to rest easy on the inflation front, comfortable in the knowledge that underlying inflation remains around the mid-point of its target, plus or minus a tenth or two.

This means that interest rates will be on hold a little longer. It could well be the case that with inflation a neutral issue, other key indicators will determine when and which direction rates next move.

This is where the next few labour force releases are so critical. It would be hard to see the RBA remaining on hold if the unemployment rate rose to 6.25 per cent and wages growth remained anchored below 3 per cent in the near term.

The Australian dollar remains an issue for the RBA, especially with the resumption of the commodity price fall that is linked to a good but not great picture for the world economy. Not that a rate cut would drive the dollar lower, but it would help guard against the damage it is doing to the economy.

The fly in the jam jar is house prices. They still seem to be chugging along at a solid double digit growth pace and any move to cut interest rates may underpin a move towards a particularly uncomfortable rate of house price appreciation. Maybe non-monetary policy policies need to be considered to address this increasingly uncomfortable lift in house prices.

All of which comes back to the good news on inflation – it is not a concern in either direction at the moment. With the Australian dollar still high, wages growth still low, it is likely to remain a neutral issue for the remainder of 2014.

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Why Australia is not recession bound

Wed, 07 Oct 2015

Below is an article I wrote for Yahoo 7 Finance:

Link is here:


Australia is not heading for a recession.

There are none of the usual recession ‘red flags’ on the economy at the moment but this has not stopped some attention seeking analysts trying to grab some media coverage with outrageous forecasts that a recession is just around the corner.

Most importantly, the world economy is growing at a decent pace.

Not strong, to be sure, but in 2016 global real GDP will rise by somewhere between 3 and 3.5 per cent.

This is sufficient to drive Australia’s export sector, instill some much needed business confidence and it is the most important anti-recession influence.

It is vital to emphasise that there is a huge difference between a recession and weak GDP growth.

Australia’s economy is weak, with the latest data showing real GDP rising by 2.0 per cent and the unemployment rate at 6.2 per cent.

Both of these results are disappointing, but the good news is that the Reserve Bank of Australia has set interest rates at record lows and the Australian dollar has fallen to around 70 US cents.

Low interest rates and a weak Aussie dollar are significant policy insurance against further economic weakness.

Will rates be cut next week?

Sun, 04 Oct 2015

Below is an article I wrote for Yahoo 7 Finance:

Link is here 


Until a few weeks ago, it seemed highly likely that the Reserve Bank of Australia would be leaving official interest rates on hold for many months to come, including next Tuesday when it next meets to discuss the economic outlook. 

Steady interest rates for the next few months remains the most likely outcome, but with the recent market turmoil, a faltering in global economic conditions and some growing evidence that the housing market is poised to head lower, the door is opening ever so slightly for an interest rate reduction.

The RBA meeting next week will dissect each morsel of information on the economy and financial markets and it will be acknowledging that the risks to its previous rosy outlook are moving squarely to the down side. 

Also read: RBA happy to keep cash rate unchanged
In other words, the RBA forecasts for a pickup in GDP growth into 2016 and with it, an eventual lowering in the unemployment rate, are under pressure.

So what has happened?

Importantly, global economic conditions are undershooting expectations with most forecasters downgrading economic growth forecasts for 2016.