Inflation Weakness Helped Spur Rate Cut

Gold Silver Reports — A “broad-based” weakening of inflation pressures helped persuade Australia’s central bank that the economy would be assisted by an interest-rate cut even as the growth outlook remained steady. Central bank considered waiting for more data in May decision.

While Reserve Bank of Australia board members considered holding the cash rate unchanged so they could await more information, policy makers on May 3 opted to cut the benchmark by a quarter point to 1.75 %, according to the minutes of its latest policy meeting.   

Governor Glenn Stevens’s first interest-rate cut in a year came after a report last month showed that some of the disinflationary pressures weighing on economies from Japan to Europe have arrived in Australia. The consumer price index dropped for the first time since 2008 in the first quarter, while annual core growth slowed to the weakest on record, prompting the central bank to slash its inflation forecasts.

“The fact that the May decision wasn’t viewed as a slam dunk reduces the likelihood of a follow-up move in June,” said Ben Jarman, an economist at JPMorgan Chase & Co in Sydney. He says the board’s focus on price pressures “arguably should further anchor the risk of future policy action around the quarterly profile of inflation results from here.”

The Australian dollar rose 1 % following the release of the minutes and was at 73.64 U.S. cents as of 12:30 p.m. in Sydney. The benchmark three-year bond yield was at 1.62 %, up 7 basis points since Monday.

“The broad-based softness in prices and labor costs signaled less momentum in domestic inflationary pressures than had previously been expected,” the bank said. “On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy.”

The RBA, which targets an underlying inflation rate of 2 % to 3 %, said in its quarterly update on May 6 that the pace of price gains is likely to remain between 1 % and 2 % this year, before picking up to 1.5 % to 2.5 % by mid-2018. The bank has also drawn attention to the nation’s low wage growth, noting that this has been a feature of a number of developed economies.

“The lower-than-expected CPI outcome could not be explained entirely by temporary factors and in fact was significantly driven by low price rises for non-tradable items,” according to the minutes. “That in turn was consistent with a range of data suggesting quite subdued growth in labor costs.”

Good Shape

Outside consumer prices, Australia’s economy has appeared in good shape as it shifts away from its reliance on mining to other drivers of growth: unemployment is at a 2 1/2-year low, business conditions and confidence are strong and the key iron ore price has rebounded about 25 % this year.

Although the RBA noted that the outlook for domestic economic activity and unemployment was “little changed” since its previous quarterly update, it said “recent data suggested that growth in Australia’s major trading partners was likely to be a little softer than previously expected,” according to the minutes. The outlook for China, Australia’s biggest trading partner, continues to be a “key issue,” it said.

The board said that the depreciation of the Aussie over the past three years has helped growth as the economy shifts away from its reliance on mining, although it reiterated that a rebound in the currency could “complicate” this.
August Cut?

The next CPI report is scheduled for July 27, and the majority of economists polled by Bloomberg anticipate that Stevens will follow that with another 25-basis-point rate reduction at the board’s August meeting. Just one of the 27 analysts surveyed expects a cut next month.

The swaps market was pricing in about an 18 % chance of an easing on June 7, compared with 24 % before Tuesday’s report. It shows a 50 % probability that the cash rate will be 1.5 % or less after the August decision, down from 57 %.

The comment that members discussed awaiting further information before acting “may appear to support the view that the RBA only ever intended to cut rates once and it was just deliberating the timing,” said Paul Dales, a Sydney-based economist with Capital Economics Ltd. “However, it’s worth remembering that the RBA had a similar timing discussion when it cut rates in February 2015 and it subsequently reduced rates again in May 2015.”  — Neal Bhai Reports

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Neal Bhai has been involved in the Bullion and Metals markets since 1998 – he has experience in many areas of the market from researching to trading and has worked in Delhi, India. Mobile No. - 9899900589 and 9582247600

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