Australia: Further RBA easing likely despite upbeat Q3 inflation data – UOB

Economist at UOB Group Lee Sue Ann expects the RBA to pump in extra stimulus measures as early as next month in spite of the recent pick-up in inflation figures in the Aussie economy.

Key Quotes

“Australia’s headline CPI came in higher at 1.6% q/q for 3Q20, higher than the estimate of 1.5% q/q, and following the record fall of 1.9% q/q in the second quarter, when child care was made temporarily free and petrol prices fell 20%. The rebound in 3Q was due to child care fees returning to their pre-COVID-19 rate having been free during the June quarter… Compared to the same period a year ago, CPI advanced 0.7% y/y, rebounding from the 1.9% y/y decline in the previous three months, and slightly higher than expectations of 0.6% y/y.”

“Trimmed mean inflation, a gauge favoured by the Reserve Bank of Australia (RBA), came in at 0.4% q/q and 1.2% y/y, from the readings of -0.1% q/q and 1.2% y/y, respectively. The RBA's weighted median was up 0.3% q/q, up from 0.1% q/q reading in 2Q20. Compared to the same period one year ago, it was 1.3% y/y, similar to the previous quarter.”

“AUD’s response to the latest figures was relatively muted. Even though the upbeat data was a welcome development, expectations are that it will not deter the RBA from reducing its policy rates. After all, inflation is still well below the floor of the RBA’s 2-3% target band and, with the Australian economy only just emerging from recession, is set to stay sub-par for a long time to come.”

“We now expect the RBA to ease policy further by cutting the cash rate, 3-year yield target and TFF rate by 15bps to 0.10% (from the current historic-low of 0.25%). The remuneration on Exchange Settlement (ES) balances, which is already at 0.10%, is likely to be either unchanged, or cut slightly, so as to remain positive. We also expect the RBA to announce further QE purchases ahead. It is debatable as to whether the RBA will set a specific quantity target for the purchase program, since it is already setting a price target for the 3-year rate. Fixing both quantity and price targets may lead to unexpected challenges going forward. Meanwhile, it is worth noting that the RBA continues to remain reluctant on negative rates (‘empirical evidence on negative rates is mixed’) and to intervene in the exchange rate (‘AUD broadly aligned with its fundamentals’).”