Inflation undershoots market expectations

Inflation undershoots market expectations

The December 2016 quarter inflation figures have surprised the market on the downside, raising the prospect of another RBA rate cut in coming months.


The Australian Bureau of Statistics revealed on Wednesday that fourth quarter 2016 headline inflation rose by 0.5 per cent quarter-on-quarter, below the market consensus of 0.7 per cent.

Year-on-year annual growth in the Consumer Price Index (CPI) was 1.5 per cent, below the market expectation of 1.6 per cent but in line with QIC chief economist Matthew Peter's prediction on Tuesday.

Both headline and underlying inflation remain below the Reserve Bank of Australia's target band of 2-3 per cent, raising the prospect of a rate cut in coming months.

Lower-than-expected inflation numbers were used as the justification for the RBA's decision to cut interest rates in August 2016.

Commenting on the release of the December 2016 quarter CPI data, AMP Capital chief economist Shane Oliver said record-low wages and spare capacity in the economy mean that inflation is likely to take longer to get back into the RBA's 2-3 per cent target band.

"We expect that continued weak inflationary pressures along with a downwards revision to the RBA’s growth forecasts following last September quarter’s contraction in GDP will force the RBA to cut the cash rate again by 0.25 per cent, taking it to 1.25 per cent," Mr Oliver said.

"A February rate cut looks unlikely at this stage – the labour market is holding up and the RBA may want to monitor the recent uptick in investor loan growth because of the risk to financial stability. But we think a rate cut is likely in May, following the next set of inflation data."

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