Crucial inflation data to determine interest rate call
To walk or not to walk?
The Reserve Bank’s first interest rate decision of the year comes on top of the inflation pressure from the Australian Bureau of Statistics on Wednesday.
While the central bank will take a range of factors into account when it meets on February 3, higher-than-expected household spending and employment figures have increased interest in the trimmed average, the RBA’s preferred measure of inflation.
Analysts think another rise in forecasts, compared to the RBA’s last forecast in November, would leave Governor Michele Bullock’s board in an embarrassing situation on interest rates.
Economists at NAB forecast the trimmed average for the December quarter to come in at 0.9 per cent; This would take the annual figure to 3.3 per cent, above the RBA’s forecast of 3.2 per cent.
As a result, NAB expects the RBA to increase again in February and May.
After a surprisingly strong jobs report last week, money markets got behind NAB’s hawkish view; traders are pricing in a roughly 60 percent chance of one increase in February and two increases by the end of the year.
But the consensus among forecasters is that the trimmed average will be 0.8 per cent, which would be in line with the RBA’s forecast.
Harry Murphy Cruise, head of economic research at Oxford Economics Australia, also predicts this.
If confirmed on Wednesday, he expects it to escalate into a clash over the RBA’s call.
But much of the revival in spending and inflation was driven by data that preceded the rise in interest rate expectations.
“I think warrants are just waiting to see, because all the forward-looking indicators suggest that households are spooked by this talk of rate hikes and will probably transfer that into their behavior around spending,” Mr Murphy Cruise told AAP.
“And that’s where communication is very, very important for the RBA.
“They can get a response from households and businesses without the need for a march, and a truly hawkish stance may also be enough to sway households.”
Meanwhile, Westpac economists expect the trimmed average to fall below the RBA’s forecast of 0.7 per cent from the previous quarter.
“An outcome at this level or lower would be enough to keep the RBA in the books, at least for now,” Westpac chief economist Luci Ellis said.
“The rhetoric will remain hawkish, but such an outcome would support the RBA’s previous assessment that some of the surprise September quarterly inflation results reflected temporary factors.”
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