Pressures remains on the Reserve Bank to cut interest rates after another weak quarter for inflation in the three months to December.
That’s two quarters in a row of easing inflationary pressures and if it hadn’t been for higher government driven charges in health, utilities and tobacco and alcohol excise charges, the actual rise would have been closer to 1.5%.
In fact so weak is inflation and the economic outlook in the view of one economist – the AMP’s Dr. Shane Oliver is that he is now forecasting two rate cuts in 2019, not one with the RBA cash rate ending the year at 1%.
The Australian Bureau of Statistics said yesterday that the Consumer Price Index rose 0.5% in the December quarter from the three months to September to be up 1.8% for the year (against 1.9% in the September quarter and an annual 2.1% in the June quarter).
It was the lowest annual reading since the September quarter of 2017.
The Australian dollar jumped from US71.5 cents to US72.08 cents just before the figures came out at 11.30am. It then dropped back under 72 US cents as Smarties in the foreign exchange market were caught out.
The ABS said the most significant rises in the December quarter are tobacco (+9.4 percent), domestic holiday travel and accommodation (+6.2 percent), fruit (+5.0 percent), new dwellings purchased by owner-occupiers (+0.4 percent) and furniture (+1.8 percent).
“The rise is partially offset by falls in automotive fuel (-2.5 percent), audio-visual and computing equipment (-3.3 percent), wine (-1.9 percent) and telecommunications equipment and services (-1.5 percent).
“While automotive fuel rose 3.3 percent in October, falls in November and December of 10.8 percent and 5.0 percent respectively resulted in a decrease across the quarter of 2.5 percent,” the ABS said.
The core measured favoured by the Reserve Bank produced a similar result – an annual rate of a touch under 1.8%, and a quarter on quarter rise of 0.4%, unchanged from the three months to September.
ABS Chief Economist, Bruce Hockman said in yesterday’s release: “Annual growth in the CPI remains below 2 percent in the December quarter 2018, with annual growth in tradables inflation of just 0.6 percent, while non-tradables inflation rose 2.4 percent. Over the past four years, annual growth in the CPI has only risen above 2 percent in two of the past 16 quarters.”
The closely watched monthly survey of business conditions and confidence from the National Australia Bank this week showed the conditions index falling under its long term average for the first time in three years – that’s a move that concerns economists as it suggests a sudden worsening in the holidays. The lack of any price pressures supports that contention.
The Reserve Bank board meets for the first time in 2019 next Tuesday and won’t move rates.
But economists will be looking for not only comments made in the post-meeting statement by Governor Phillip Lowe, but also Lowe’s first major speech the next day.
The following Friday sees the first Statement On Monetary Policy for the year from the central bank that will contain new forecasts for the economy for 2019 and 20120.
These forecasts will be the basis for discussion on Tuesday and Lowe’s speech. Economists led by the AMP’s Dr. Shane Oliver believe that data flow over the holidays and weak retail sales reports have increased the chances of a rate cut this year and we can forget the timing of a rate rise.
As we head towards a federal election, the various political parties, their leaders and media shills should realise that central banks only cut rates when an economy stumbles.
Wages data for the December quarter will be out in three weeks while the December quarter and 2018 GDP report will be released by the ABS in early March – all in time for the election campaign.
“Underlying pricing pressures in Australia have been weak over recent years and the December quarter inflation data confirms that this remains the case,” Dr. Oliver wrote yesterday (indeed the ABS pointed out that the annual inflation rate has only topped 2% in two of the last 16 quarters!).
“While Australian GDP growth was decent in 2018, it was not enough to work through spare capacity in the economy. We expect slower growth in 2019 – now likely to be around 2-2.5% – which means that spare capacity pressures will continue to put downward pressure on prices (and wages).
“Combined with the run of poor national data lately including a drop in business conditions, lower consumer sentiment, falling manufacturing PMI’s, falling building approvals and falling home prices we think the Reserve Bank will need to downgrade its optimistic growth forecasts (of around 3.25% for 2019) before cutting the cash rate in the second half of the year.
“We see the cash rate ending 2019 at 1%,” Dr. Oliver predicted.
