The week that was & the week ahead

The week that was       

The RBA has again been showed to have made an error by yet again missing its self imposed target of 2 to 3 per cent for underlying inflation. In the December quarter, underlying inflation rose just 0.4 per cent for an annual rise of 1.9 per cent. For two and a quarter years now, the underlying inflation rate has been below 2 per cent in a sure sign of ongoing subdued economic growth and a soft labour market characterised by high labour underutilisation and low wages growth.

Perhaps disconcertingly for those looking for a lift in inflation pressures on the back of the tremendous pace of job creation through 2017, there are converse signs of a deceleration in inflation from an already low starting point. In the first half of 2017, underlying inflation rose at an annual rate of 2.1 per cent; in the second half of the year, this fell to just 1.6 per cent.  With economic and wages growth still problematic, it seems certain that inflation will remain below 2 per cent for the next year.

Source: IFM Investors

The week ahead

It is a busy week for economic data but the highlight is likely to be the RBA Board meeting on Tuesday. 

After another big miss on inflation, will it retain its neutral to tightening bias for interest rates? What about the fact the Aussie dollar is about 8 per cent higher than when it last met? Export values are now falling, despite the upbeat conditions in the global economy. Is this the result of the Aussie dollar strength? And despite the decent lift in employment in recent times, the unemployment rate is also higher now than at the time of the last RBA meeting, up 0.15 percentage points in the last two months.

What’s more, house prices are falling – they are now down more than 3 per cent in Sydney and around 1.5 per cent lower nationally from the peak levels a few months ago. Good news, to be sure, for those looking to deflate some of the house price exuberance, but what would happen in the RBA followed through with its rhetoric and lifted interest rates as prices were falling?

Economic mayhem, I think is the answer.

Maybe the RBA has had a rethink over the new year break and will look to its inflation target, full employment and wages when it judges the appropriate stance for monetary policy. The market is pricing in two 25 basis point rate hikes by the middle of 2019 which looks somewhat misplaced, given how low inflation actually is.

Source: ASX