Australian Inflation Expectations Rise in October

An increase was recorded in the Australian inflation expectations for the month of October, this is the first rise in 3 months and it indicates that the central bank policies are finally finding its way into the rate of price growth. The Melbourne Institute’s 12 month measure of inflation expectations edged higher to 3.7% in October, from the previous month’s reading of 3.3% which was the highest level since July. The Melbourne Institute last week stated that, “consumer inflation rose 0.4% in September and was up 1.3% on an annualized basis. That was the highest monthly reading since July”.

The Australian government publishes official CPI figures every quarter, allowing for a major gap in the reporting of high profile CPI data. While there has been some speculation that the Reserve Bank of Australia (RBA) may cut interest rates again, Australian Treasurer Scott Morrison is emphatically opposed to looser monetary policy. Morrison recently told the AFR that monetary policy has “exhausted its effectiveness,” adding that it’s “ability to impact and influence is diminishing.”

After cutting rates twice this year to new record lows, the RBA has maintained it has “more room” to move if needed. According to analysts at HSBC, the Reserve Bank is unlikely to come off its current rate of 1.5% anytime soon.

The ANZ’s Felicity Emmett also stated that, “Our central case is unchanged and we see rates on hold at this point at 1.5%, albeit with a clear risk of further easing. At this stage, we think that the RBA will want to assess the impact of the May and August cuts, with a judgment on the need for further easing depending on the next CPI (due 26 October), as well as labor and housing market data released in the interim”.

The new RBA Governor and the Treasurer have signed an updated Statement on the Conduct of Monetary Policy. The formulation of the inflation target remains the same at 2-3% on average, but the length of time for the target has been tweaked from “over the cycle” to “over time”. Financial stability considerations have also been explicitly brought into the monetary policy objectives paragraph along with an inference to inflation expectations. Overall it is suggestive of little change in direction; perhaps a little more flexibility at the margin.

The Aussie dollar remains comfortably contained within the broad 0.7450 - 0.7750 trading range established over two months ago. Barring an extremely low Q3 Australian CPI print (due on 26 October) a range break-out in AUD/USD will likely have to emanate from the USD side of the equation and suggesting the current range could well survive until after the 8 November US election. Ultimately, we still see the (inevitable) break coming to the downside. We retain our forecasts for AUD/USD of 75 cents for end-2016, 70 cents by end-2017 and hitting a low of 68 cents in mid-2018 before inching back up.