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With evidence highlighting that inflation might not be as hot as Angeline Jolie in Salt, it’s starting to look like the Reserve Bank of Australia may pause on any rate hikes for the rest of the year!
Despite the government raising tobacco tax rates by 25%, recent data revealed that it hasn’t sparked too much of a rise in inflation. According to the latest quarterly CPI report, price rose by a mere 0.6% during the second quarter of 2010, which was much worse than expectations of a 1.0% increase. This also failed to hit the previous quarter’s figure of 0.9%.

While the prices of cigarettes, gas, and medicine all rose, consumers have started paying less for entertainment, eating, and texting. This caused the drop in the CPI for the second quarter. On an annualized basis, this brought the annualized inflation rate to 3.1%. Hmmm, wait an Aussie minute… Isn’t this still above the RBA’s 2% to 3% inflation threshold?

Yes that’s true, but inflation will most likely fall back within the RBA’s target as the year comes to a close. The effects of the tobacco tax rate hike will eventually subside and Australia’s relatively high interest rate will cap private credit growth.

Given these reasons, the RBA could have little reason to hike rates this month. With inflation projected to stay weak in the near term, Glenn Stevens and his merry men could put an end to their aggressive tightening cycle. In fact, since inflationary pressures are not expected to be as strong as Big Pippin’s muscles anytime soon, the RBA could keep rates on hold for the rest of the year.

Maybe it’s about time the RBA took a breather from all its hawkish monetary policy moves. After all, they hiked rates six times already since October last year. That’s more than the number of push-ups I can do… with one hand, of course!

Kidding aside, the possibility of a double-dip recession is no laughing matter, which is probably why the RBA is taking a more cautious stance. If hotshot nations such as the US and China are starting to post less-than-stellar economic figures, Australia’s growth could be in trouble as well. Australia may have been able to dodge a technical recession back then but who knows if they could pull off that stunt again? Better safe than sorry!