Earlier this month, I discussed five reasons why the RBA ought to deliver more stimulus at the next Board meeting in November: Australia remains stuck in a wage recession, animal spirits in the corporate sector show little sign of revival, macro-prudential measures are curbing rapid growth in mortgage lending to investors, a low September quarter CPI print should offer the RBA the positive narrative that it seeks to cut rates, and the absence of an explicit easing bias has not stopped the central bank from easing in the past.
At the time, interbank futures were implying a 25% chance of a rate cut in November. Following the release of a benign 3Q CPI, those expectations have ramped up to almost 70% from 30% immediately prior to the CPI print (see chart).
Prior to the CPI release, three developments this month would have influenced the RBA’s thinking.
- The latest employment report recorded a small contraction in the month of September.
- The major banks’ decision to lift mortgage rates (dubiously citing APRA’s lift in mortgage risk weights) would have allayed the central bank’s concerns around deteriorating lending practices.
- The worsening global growth environment has led to expectations of more central bank stimulus globally. Market participants have pushed back expectations of lift off in the Federal Funds rate to next year, the ECB has flagged that it will consider more monetary accommodation at its December policy meeting and the PBOC has cut the benchmark lending rate to bring the cumulative decline to 165 basis points in the past 12 months.
The 3Q CPI release showed that core inflation recorded a quarterly increase of 0.3%, the lowest outcome since 2011. The year-on-year increase of 2.2% is remains entrenched at the bottom end of the RBA’s target range (see chart).
My expectation that food deflation would intensify was not realised. But the food & non-alcoholic beverage component recorded a rise of only 0.1% and has been broadly stagnant for the past 12 months. This is unlikely to change while competitive pressures amongst supermarket retailers remain intense. Electricity retail prices declined by 3.5%, consistent with the recent determinations by the Australian Energy Regulator for lower network charges in NSW and South Australia.
The low core CPI print surprised even Evidente's benign expectations and reinforces the view that the Australian economy continues to suffer from a shortfall in aggregate demand. The CPI has also clearly given the RBA some comfort that importers are absorbing the effects of the A$ depreciation through lower profit margins, thus limiting the flow through of the lower currency into higher consumer prices. Importantly, the central bank now has the smoking gun to deliver another rate cut on Melbourne Cup day; a positive narrative of benign inflation.
So Mr Stevens, what are you waiting for?