Aussie rate cut bets ris­ing on in­fla­tion ex­pec­ta­tions

The Pak Banker - - MARKETS/SPORTS -

Traders are bet­ting Aus­tralia's cen­tral bank will cut in­ter­est rates as early as next month as in­fla­tion sinks below its tar­get.

The fu­tures mar­ket is pric­ing in a 58 per­cent chance the Re­serve Bank of Aus­tralia will cut its cash rate 25 ba­sis points at its Aug. 2 meet­ing after a twom­onth pause. The odds are up from 48 per­cent a week ago. Con­sumer-price gains slowed to an an­nual 1.1 per­cent in the first quar­ter, ac­cord­ing to the me­dian fore­cast of econ­o­mists sur­veyed by Bloomberg be­fore the re­port July 27. Core in­fla­tion dipped below the RBA's 2 per­cent to 3 per­cent tar­get range for the first time this cen­tury in three months ended March 31. Pol­icy mak­ers, who meet a week after the CPI data is pub­lished, in May noted global dis­in­fla­tion trends com­pound­ing Aus­tralia's his­tor­i­cally low wage in­creases. The Aus­tralian dol­lar's rally, which saw it clock up a seven-week win­ning streak through July 15, also adds to the case for a rate cut, with Gov­er­nor Glenn Stevens warn­ing in his last four meet­ings the ap­pre­ci­at­ing ex­change rate could com­pli­cate the econ­omy's tran­si­tion away from min­ing in­vest­ment. "A com­bi­na­tion of the need to avoid cur­rency strength and con­fi­dence in a low CPI num­ber is un­der­pin­ning ex­pec­ta­tions the RBA will cut in Au­gust," Adam Don­ald­son, head of debt re­search at Com­mon­wealth Bank of Aus­tralia said. "Weak wage growth, global dis­in­fla­tion trends, and ev­i­dence of re­tail dis­count­ing are all con­tribut­ing to the in­fla­tion view."

CBA ex­pects the cen­tral bank to cut in both Au­gust and Novem­ber, though the sec­ond re­duc­tion could be ear­lier if the in­fla­tion read­ing were "very weak'' and house-price growth flat­tens, Don­ald­son said.

Mea­sures of in­fla­tion ex­pec­ta­tions -- from con­sumers, mar­ket econ­o­mists, union of­fi­cials and fi­nan­cial mar­kets -re­mained below av­er­age, the cen­tral bank said in min­utes of its July meet­ing, at which it left rates un­changed at a record-low 1.75 per­cent. The RBA tracks core in­fla­tion based on the trimmed mean con­sumer price in­dex and the weighted me­dian CPI. The RBA will also up­date its quar­terly fore­casts for in­fla­tion and growth in time for the Au­gust pol­icy meet­ing.

Econ­o­mists at Na­tional Aus­tralia Bank Ltd. in­clud­ing Ta­pas Strick­land, fore­cast in a note Wed­nes­day a core in­fla­tion read­ing of 0.4 per­cent to 0.5 per­cent in the sec­ond quar­ter from the prior three months, com­pared with RBA ex­pec­ta­tions for 0.4 per­cent. That should be enough al­low the cen­tral bank stay pat, though a num­ber below that will force a cut, it said.

The RBA in its min­utes Tues­day kept its op­tions open as it pre­dicted the econ­omy prob­a­bly cooled last quar­ter, mo­men­tum in the jobs mar­ket has eased and in­fla­tion is set to re­main weak.

In­for­ma­tion on in­fla­tion­ary pres­sures and the la­bor and hous­ing mar­kets "would al­low the board to re­fine its as­sess­ment of the out­look for growth and in­fla­tion and to make any ad­just­ment to the stance of pol­icy that may be ap­pro­pri­ate," the cen­tral bank said. It said re­tail­ers were fac­ing pres­sure to dis­count prices due to com­pe­ti­tion.

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