The week that was
The consumer price index confirmed inflation remains weak, even if there was a small uptick in the annual rate of underlying inflation. In the March quarter, the CPI rose 1.9 per cent in annual terms while the underlying rate rose to a two year high of 2.0 per cent. Inflation remains near the bottom of the RBA 2 to 3 per cent target range but still appears to be a long way from approaching the middle of the range. There appears a near zero risk it will approach the top of the range for at least a couple of years.
With the economy still growing below trend, the labour market remaining soft with employment stalling and the unemployment rate steady, inflation is likely to remain contained for some time. Only when the economy picks up pace, with real GDP growth well above 3 per cent and the unemployment rate falling below 5 per cent will inflation lift.
The week ahead
Next week is all about the Reserve Bank.
It has its monthly Board meeting on Tuesday and then on Friday it will release its Quarterly Statement on Monetary Policy. The interest will be whether it hoses down its upbeat expectations for the economy, particularly in light of the recent stalling in employment growth, the on going low inflation rate and the potential jolt to confidence and economic activity from the fall out of the bank Royal Commission.
While there is no doubt official interest rates will be on hold at the Board meeting, the RBA must be starting to be worried that is long awaited and oft predicted lift in economic growth, rise in inflation in fall in the unemployment rate is simply not happening. This is the key reason behind the RBA’s reluctance to trim interest rates when the rest of the industrialised world had interest rates 100 or more basis points lower than in Australia.
If the RBA does take account of recent news and alters its rose-coloured view of the world, the market will have to reprice its expectations for interest rate rises which is likely to pull the rug out from the Aussie dollar, which should fall sharply.
In terms of data next week, there is also top tier news with data on international trade (another decent surplus?), building approvals (a further edging lower in new activity?), monthly inflation (data for April) and house prices (another drop is on the cards).