Inflationary pressures appear to have cooled in the early stages of the fourth quarter, according to Commonwealth Bank’s analysis of recent data, reducing the risk of an upside surprise in the Q4 consumer price index (CPI) for the Reserve Bank of Australia (RBA).
In an economic update titled, “Early pulse of inflation data in Q4 23 – so far so good”, the big four bank pointed out that price measures in the latest NAB Business Survey, Judo Bank PMIs, and Melbourne Institute Inflation Gauge all eased during October.
The RBA recently predicted that annual headline and trimmed mean inflation will ease to 4.5 per cent in Q4, equating to a quarterly change of approximately 1 per cent.
“The RBA will almost certainly leave the cash rate on hold in February 2024 if core inflation prints at or below their forecast,” commented Commonwealth Bank head of Australian economics Gareth Aird.
“Conversely the RBA will likely tighten policy again if the inflation data comes in stronger than their forecast, as they did in November.”
Regarding the RBA’s meeting next month, Mr Aird said that the central bank will almost certainly leave the cash rate on hold following November’s 25 basis point (bp) hike.
“There was nothing in the Q3 23 WPI or October labour force survey to see the RBA pull the rate hike trigger again in December. And there is simply not enough other economic information ahead of the December meeting for the board to move rates higher,” he said.
While the monthly CPI indicator for October will be released on 29 November, Mr Aird noted that this is only a partial read on inflation and argued that it would take “something extraordinary” in the indicator for the December meeting to be considered “live”.
Instead, he suggested that the November monthly CPI indicator, which will be released on 10 January, will be more closely watched by markets.
“It will provide an official update on how market services prices are tracking in the December quarter. And importantly, it will allow analysts to compare how the prices data in Q4 23 is tracking against the RBA’s expectations,” Mr Aird explained.
In the Q4 2024 CPI due out on 31 January, CBA expects trimmed mean inflation of 0.9 per cent quarter-on-quarter (q/q) and 4.4 per cent year-on-year (y/y), slightly below the RBA’s expectations of 1.0 per cent q/q and 4.5 per cent y/y.
On this basis, the big four bank is not currently forecasting a rate hike in February, with CBA’s base case being that the cash rate has already peaked at 4.35 per cent.
“But as the RBA rightly notes that there are both upside and downside risks to the inflation outlook. And the RBA assesses that upside risks to inflation have increased,” said Mr Aird.
“The RBA’s assessment of the inflation risks mean that the board is likely to have very little tolerance for an upside surprise in the Q4 23 CPI. As such, markets are right to price the chance that policy is tightened again in February.”
