As the central bank prepares to announce its next monetary policy decision in early June, this week’s unexpectedly high inflation data out of the UK is likely to catch the attention of the Reserve Bank of Australia (RBA), according to AMP chief economist Shane Oliver.
The UK’s Consumer Prices Index (CPI) rose by 8.7 per cent over the year to April, down from 10.1 per cent in March, but well above expectations for an 8.2 per cent lift.
“The RBA will no doubt look at it and say, ‘well there’s sticky inflation in the UK, maybe that means we’ll see sticky inflation here’, so it will keep the RBA hawkish until they see a more decisive decline in inflation here. There’s always a risk that we follow a similar path,” he said.
But Dr Oliver said it was difficult to determine how significant this risk is due to the impacts of Brexit, which led to an increase in import prices in the UK and reduced competition with the European Union.
He pointed out that, compared to the UK, other countries around the world have been experiencing a somewhat more positive trend regarding inflation.
“It’s hard to know to what degree that translates to other countries, because in other countries, the trend isn’t quite as adverse as it is in the UK,” Dr Oliver stated.
For example, Dr Oliver pointed to the US, where inflation has been trending down both in terms of headline and underlying figures.
“Whereas the UK, and to a lesser degree Europe, haven’t been quite as positive, which may just mean there’s more work to do in the UK than there is elsewhere and it would be wrong to project it to other countries,” Dr Oliver continued.
“Markets will be nervous about it, and it certainly puts more pressure on the Bank of England, but it’s just a bit unclear as to what degree it translates to other countries.”
Bank of England set to hike
GSFM investment strategist Stephen Miller said the UK’s April CPI figures “almost certainly” meant a rate hike of at least 25 basis points (bp) was to be expected at the Bank of England’s next meeting on 22 June, pushing the policy rate to at least 4.75 per cent.
“Indeed, given the magnitude of the data surprise, and coming after the March figures also surprised on the upside by a considerable margin, it may be that discussions of a 50 bp increase make the June agenda,” he added.
Mr Miller said the lesson for central banks from the high inflation of the 1970s was any delay in articulating a coherent and firm response to an inflation threat heightens the risks of a more damaging macroeconomic dislocation in terms of employment and activity later on.
“As far as the Australian government’s (understandable) anxiety regarding higher interest rates, it is probably the case that given the election cycle, it is best to get interest rate rises out of the way more quickly rather than draw them out,” he suggested.
“If prior RBA prevarication, combined with a potentially challenging inflation environment requires the RBA to slam the brakes later in the cycle resulting in an even greater dislocation in activity and employment then that might create political (and not just economic) challenges for the government.”
Inflation in Australia
Locally, the quarterly rate of inflation fell to 1.4 per cent during the March quarter, down from 1.9 per cent in the December quarter. Annualised inflation also came in 0.8 percentage points lower than the December quarter peak of 7.8 per cent.
While the next quarterly inflation data is not due until late July, the Australian Bureau of Statistics (ABS) will release its next monthly CPI indicator covering the month of April on 31 May, leading into the RBA’s next decision on 6 June.
“It’ll probably confirm again that inflation has passed its peak, but they will still worry that it’s too high,” Dr Oliver predicted.
According to the most recent monthly CPI indicator from the ABS, headline inflation over the 12 months to March fell by 0.5 percentage points to 6.3 per cent.
“Unless you see a very low monthly number, it’s quite possible that it just treads water this time and stays around 6.3 per cent, and maybe edges up a bit to 6.4 per cent, which is still well down from the 8.4 per cent peak that it saw back in December, but maybe still too high for the RBA’s comfort,” Dr Oliver stated.
Commonwealth Bank (CBA) head of Australian economics Gareth Aird predicted April’s monthly CPI indicator will show annual inflation of 6.4 per cent and noted it would need to rise much higher than expected for the RBA’s June board meeting to be considered “live”.
Instead, Mr Aird explained that May’s monthly indicator would be of particular importance, given April’s indicator only included up to date price information for 62 per cent of the weight of the quarterly CPI and was heavily skewed towards goods prices.
“The RBA is presently more concerned around services inflation. So we suspect it will be very hard for the April monthly CPI indicator to be the ‘smoking gun’ that shifts the balance towards a rate rise in June given the rest of the key data the RBA has put weight on so far over the month has printed softer than expectations,” he said.
“The rate of inflation in the economy will not drop to the desired level overnight. But the data is encouraging and is directionally moving the right way. The case for additional RBA policy tightening is waning.”
Both CBA and AMP have predicted the RBA will pause at its meeting in June, however Dr Oliver has warned the risk of further rate hikes is very high.
