Soft inflation supports Australian rates remaining on hold until late 2019
Further evidence of a soft inflationary environment supports the consensus view that the Reserve Bank of Australia will keep the cash rate on hold until late 2019, according to market economists.
While the data revealed some surprisingly positive forces behind the core inflation figure, inflation remains below the RBA's target band of 2 per cent to 3 per cent. The headline consumer price index rose 0.4 per cent in the March quarter versus expectations of a 0.5 per cent result; annually it is tracking at 1.9 per cent, while the market was looking for a 2 per cent reading.
The latest data continues the longest period of weaker-than-expected headline CPI results on record according to Citigroup, which also noted that without government administered or regulated price rises, inflation was "non existent". The stretch of six consecutive weaker quarters relative to expectations is "more marked than seen in a number of major economies", economist Josh Williamson found.
Prices rose in seven of the 11 major categories in the first quarter, with the biggest growth coming in education (2.6 per cent) and health (2.2 per cent). Despite education being the strongest source of nominal inflationary action, and the third-largest contributor to the overall result, the 2.6 per cent rise was the lowest in decades according to ANZ, which was counting on a higher result from the category.
Despite some encouraging signs, including the weighted median measure rising to 2 per cent on an annual basis, economists still say that inflation isn't likely to accelerate in the near future.
St George senior economist Janu Chan said that in the medium term, inflation would fall short of the middle of the RBA's target band.
"There are some upward price pressures domestically, including utilities, education and healthcare," she said. "However, ongoing spare capacity in the labour market, slow wage growth and the persistent downward pressure on certain goods thanks to intense competition suggests that price pressures will remain muted."
ANZ senior economist Jo Masters says stronger wage growth is needed to increase inflationary pressures in the economy.
"With retail prices expected to continue to drag, a lift in inflationary pressures likely requires stronger wage growth to push domestic services inflation higher," she said. "We expect wage growth to lift gradually, and for that to feed through to inflation over time."
Westpac senior economist Justin Smirk was was more optimistic, predicting that inflation could lift to inside the RBA's target band by year's end, and predicts that during 2018 inflation will peak at 2.4 per cent before easing back to 2.1 per cent by the end of the year.
That supports the mainstream view that the RBA's cash rate is likely to remain on hold until at least the end of the year, if not well into 2019. The implied cash rate in 12 months' time has retreated to 1.68 per cent in the wake of the March CPI result, meaning the prospect of a single hike to 1.75 per cent within the next year is not priced by the market. The RBA meets next on Tuesday when it is expected to keep rates on hold at 1.5 per cent.
Kate Hickie, economist from Capital Economics, forecasts the RBA will keep rates at 1.5 per cent until late 2019 as GDP growth and inflation remain weaker than the central bank expects.
"We doubt that economic conditions will be strong enough to warrant a rate rise soon. We expect that GDP growth will rise only marginally this year, from 2.3 per cent in 2017 to just 2.5 per cent, as a slowing housing market and low wage growth hold back dwellings investment and consumption. That would be well below the RBA's previously published growth forecast and is likely to be below the RBA's updated forecast, too."