The CPI data release last week certainly set the cat amongst the pigeons with regard to monetary policy. Suddenly all the talk is that it appears the annual inflation rate will rise above the Reserve Bank’s 2% to 3% target range going forward and there is little the RBA can do right now to curb inflation.
This is a really good test to see how reactionary the RBA is. If it believes that inflation will return to within its target band in the short term then there is little point reacting to this temporary up-tick in inflation. However, as it takes a few quarters for any interest rate change to filter through the economy and impact CPI; a rate rise now, in anticipation of an increasing inflation rate might begin to have an effect by late this year.
The RBA needs to base its rates decision at next week’s first board meeting for 2014 on where it believes inflation will be toward the end of this year, rather than make a snap judgement on the CPI data last week.
Financial markets are unwinding their expectations of future rate cuts and it appears interest rates are on hold, for now (refer below).