Australia's inflation numbers silence calls for a rate cut next week

Stronger than expected core inflation numbers for the final quarter of 2014 have helped to quash rumours that the RBA may cut the OCR at its monetary policy meeting next Tuesday, sparking a rally in the Australian dollar. AUDUSD jumped through 0.8000 shortly after the figures were released on Wednesday as OIS pricing indicated that the market cut its expectations for a 25 basis point cut next Tuesday to below 20% from above 40% yesterday.

Favour core inflation numbers over the headline figures

Consumer prices rose 0.2% last quarter, which was below expectations of a 0.3% rise. This dragged headline inflation to a very unimpressive 1.7% y/y. However, the falling rate of headline inflation can be mostly attributed to falling fuel prices which isn’t a bad thing for the economy; hence these numbers were ignored by the market. Instead, investors chose to focus on the more precise core inflation numbers which showed that core consumer prices rose an encouraging 0.7% last quarter (both trimmed mean and weighted median CPI rose 0.7% q/q). The two measures of core inflation put consumer price growth at 2.2% (trimmed mean) and 2.3% (weighted median), which is just above the bottom of the RBA’s 2-3% target range and, in the case of the latter, was slightly above market expectations.

What’s next for the RBA?

Today’s numbers aren’t going to be enough to completely rule out the possibility of the RBA cutting the OCR this year. Core inflation has been trending lower since mid-2014 and there are only tentative signs of a rebound at this stage, so if inflation continues to trend lower the RBA may be forced to act. The next set of official inflation figures are due out in late April, so based on that alone we don’t expect any movement in the OCR until at least then. However, the release of capital expenditure data in late February may open the door for a rate cut in March if we don’t see a pick-up in non-mining investment intentions and expenditure.

The aussie

AUDUSD has drifted back below 0.8000 since its initial rally on the back of today’s better than expected core CPI numbers. However, the pair could drift back above this level if we see board USD weakness or a rally in risk sentiment. Key short-term support currently resides around 0.7900 but it would likely take a strong rally in USD to push AUDUSD through that level in the near-term.

Source: FOREX.com