Yesterday, the Australian Bureau of Statistics released the Q1 2013 Consumer Price Index (CPI). It showed that the average price of consumer goods and services climbed 0.4% during the first quarter, which was roughly half the 0.7% increase the market had initially expected.
Meanwhile, the Trimmed Mean CPI–the version that excludes the 30% most volatile items in its computation–printed only a 0.3% rise, which is the slowest growth reported in 14 years. Annualized, the inflation rate now stands at 2.5%, lower than the consensus forecast of 2.8%. The weak inflation figures add fuel to the growing calls for an RBA rate cut.
If you recall, the RBA has said in the past that it has enough scope to ease. To a certain extent, the central bank does have reason to do so, due to Australia’s deteriorating fundamentals.
For example, Australia’s labor market isn’t performing so well. Though Australia enjoys an unemployment rate that other countries would kill to have, at 5.6%, it’s quite a bit higher than what Australians are used to. The unemployment has been climbing steadily since mid-2012, back when joblessness fell as low as 4.9%.
Resource investment, which supported the country’s robust growth in recent years, has been showing signs of peaking as companies have been cutting back on their investments and spending. Without this key contributor to growth, Australia will need to find another bright spot to fill the void and lift the economy.
With the addition of weaker than expected inflation, it certainly seems as though the RBA has legroom to finally give the markets the rate cut that they have been waiting so anxiously for.
But will the RBA bite the bullet?
Of course, having the luxury of lower-than-expected inflation isn’t necessarily enough to get the RBA to act.
Though there are signs of weakness in the Australian economy, it isn’t exactly gasping for air. Just take a look at the latest consumer spending stats.
Retail sales have been showing an unexpectedly strong rebound so far this year, and analysts are attributing this growth to the RBA’s previous rate cuts. January posted a growth of 0.9%, which is more than double the forecasted figure, while February sales surged by a whopping 1.3% to surpass the measly 0.3% growth that many had predicted.
Clearly, the central bank’s previous rate cuts are still working their magic, and it’s likely that policymakers will want to see just how far these cuts will take the economy before they decide to slash rates once again.
After all, cutting rates comes at a risk. Allow me to explain, my fellow forex fanatics!
One of the reasons the Aussie has been so strong is because of Australia’s high interest rates. As we learned from the School of Pipsology, when a country has high interest rates, it usually attracts investors, resulting in a stronger currency.
If the RBA decides to continue with slashing its cash rate, it would strip the Aussie of this key appeal, which could weaken it. In turn, this could lead inflation to soar back up and give the RBA a headache.
I guess what I’m saying is that an ill-timed rate cut could end up doing more bad than good, so in my opinion, it’s best for the RBA to adopt the wait-and-see approach and sit on the sidelines until it gets more confirmation of economic weakness.