What the Weak Australian CPI Means for the RBA and AUD

Heads up! The Australian economy just reported a weaker than expected CPI (consumer price index) reading for the first quarter of the year. The headline figure showed a 0.6% increase in price levels for the period, falling a couple of notches short of the estimated 0.8% rise. Meanwhile, the trimmed mean CPI or the core version of the report came in at 0.5% instead of the projected 0.7% figure.

As a result, the Australian dollar sold off sharply against its forex counterparts. AUD/USD slipped by roughly 50 pips instantly after the report was printed, eventually falling to the .9300 area a few minutes later. Yowza!

AUD/USD 15-min Forex Chart

AUD/USD 15-min Forex Chart

If you’re wondering why this report is such a huge deal, then you should remember that inflation data is usually one of the biggest factors influencing monetary policy decisions. After all, the central bank’s priority is to maintain price stability in the country. A weak CPI reading reflects a slow increase in price levels, which is enough reason for a central bank to keep an accommodative monetary policy.

In the RBA‘s case, the weak quarterly inflation report allows them to stick to its neutral stance and lessens the odds that they will tighten monetary policy any time soon. Market analysts predict that the an RBA rate hike is not likely to happen until 2015, which means that there’s less pressure for Governor Stevens and his men to tighten policy!

Underlying annual inflation, which is calculated by getting the average of the trimmed mean CPI and weighted mean CPI, stands at 2.65%. This is the figure that RBA policymakers watch closely and it is currently safely within the RBA’s 2% to 3% target range – another reason for the RBA to sit on its hands in the meantime.

Understandably, Aussie bulls were disappointed to see the CPI results as these dashed hopes of an interest rate increase in the coming months. Come to think of it, the rising value of the Australian dollar may be partly to blame for the subdued inflation data. Further weakness in price levels might even lead RBA officials to jawbone the currency later on.

Do you think the weak CPI reading will spark a long-term AUD downtrend? Cast your votes in our poll below!