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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

Despite the lower than expected CPI data released last week, financial markets don’t expect the Reserve Bank (RBA) to cut rates again in this cycle. The last time rates were cut by the RBA, headline CPI was 1.0% annually while underlying inflation was at 1.5% and we’re not back at these slower growth rates. Similarly however, price pressures remain remarkably subdued across large parts of the economy and there will be no rate hike any time soon either.

At the start of last week the market was eyeing two rate hikes in 2018 with the probability of a second RBA hike at just under 40% at the November meeting next year. Following the CPI data the market is now only pricing one rate hike in a year’s time (refer chart below).

Interbank financial futures pricing of the cash rate

Interbank financial futures pricing of the cash rate

The Government was thrown into crisis last Friday after Deputy Prime Minister Barnaby Joyce was declared ineligible to sit in Parliament because he breached Section 44 of Australia’s Constitution by also being a citizen of New Zealand when elected. The High Court ruling wipes out Prime Minister Malcolm Turnbull’s one-seat majority in the Lower House and will force Joyce, who has since renounced his New Zealand citizenship, to re-contest the seat in a special election likely to be held in early December.

Opinion polls show Joyce is unlikely to lose a by-election but this may be at least a month away. Meanwhile, at least three independents have said they’ll back Malcolm Turnbull if the Opposition seeks a vote of no confidence in the meantime. Still, the Government now faces weeks of uncertainty that could further delay efforts to pass legislation including the company tax cuts. The ineligibility of Ministers may bring into question decisions made by them. Under the Constitution it is possible these decisions could be challenged by the Opposition.

The Australian dollar and the S&P/ASX 200 Index fell immediately after the court ruling but managed to recoup most of the losses by the close last Friday.

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Source: Rural Bank

 

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