The focus this week will be on the next reading of inflation, which is expected to be one of the lowest in three years. Out this Wednesday, the December quarter Consumer Price Index (CPI) is forecast to have risen by 0.3%, which would deliver an annual headline CPI of 1.8%. This would be the third lowest reading on record, after 1.2% in the June quarter of 2012, and 1.6% in the March quarter of that year. A low number would be almost totally due to the fall in petrol prices over the quarter after the price of oil more than halved in the past six months.
The Reserve Bank’s preferred measure of underlying inflation, which excludes volatile price movements, such as the petrol price plunge, is forecast to rise by 0.5% in the quarter, and 2.2% over the year to December. This is within the RBA’s 2% to 3% target band and should not prompt the RBA to consider a rate cut. The result would need to be +0.2% or lower to prompt a review of a move by the RBA.
That said, markets continue to build in expectations of rate cuts, with the probability of a move by the RBA as early as next week just under 40% as I write. Similarly, the inter-bank bill futures have almost two rate cuts priced in by December 2015 (refer chart below).
However, there is little consensus amongst either the market or economists about the timing of any RBA rate cuts and this will in itself continue to keep volatility high, especially around key economic data releases.
Fears surrounding the election of Greek anti-austerity party Syriza were short-lived and investors returned to the European markets, which also pushed the US Dollar higher and with oil and iron ore prices extending their 2015 losses, our currency hit a six-year low of USD0.7857 over the weekend. The Australian dollar has recovered some of the losses this morning but remains below USD0.80.