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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

The last week has certainly been a week with plenty to ponder.

In the US, the Federal Reserve left rates unchanged showing a reluctance to pull the trigger, but the door has been left open to a resumption of rate hikes in June. It was a different story in Australia and Japan though. The Bank of Japan caught the market on the hop last week by leaving policy unchanged when further easing was expected.

In Australia, deflation (defined as “a negative inflation rate”) has hit for the first time in more than seven years, with a record-low inflation number pushing markets and economists to change their view to one of seeing little risk in the RBA taking advantage of the extraordinarily low CPI and easing monetary policy again.

There is a wide range of factors driving these low inflation outcomes. Some are clearly cyclical, like lower energy prices, and some seem more permanent, like the very low level of wage growth despite a falling unemployment rate. It was widely acknowledged that a “soft inflation” number would probably not spark a reaction from the RBA, but this CPI number is a stunning result and may generate policy action (either monetary or fiscal). The RBA will assess the inflation result, and other factors as they revise forecast to be delivered to the RBA Board this Tuesday and to the public in this Friday’s Statement on Monetary Policy.

Nonetheless, the probability of an interest rate cut this week (on the day the Federal Budget is released) has increased to 55% (from around 10% a week ago), with an August move now fully priced in by financial markets (refer chart below).

Financial markets futures pricing of the cash rate

If the RBA is convinced that inflation will move back towards their target band next year, which will depend more on their growth outlook, they may hold fire (on rates) this week. It will be a close call, but I am nervously holding onto my outlook that the RBA will leave the cash rate unchanged this week.

Source: Rural Bank


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