Daily Commentary BY THE CURVE TEAM –

CPI Miss Shouldn’t Bother RBA…. For Now

1st of November, 2018

The highly anticipated release of the Q3 inflation data not only was on the softer side as previously flagged by the RBA, but missed to the downside of expectations.

Inflation was always expected to be a little softer in the third quarter this year and the RBA most recent forecasts flagged as much. Changes to child care rebated saw the price of childcare fall 13% for the quarter alone, which provided a drag on the overall number.

Dragging inflation further below expectations for the quarter was a bigger than expected impact from the housing component. A component which includes changes in rents and house purchases and a associated costs.

The fact that inflation has moved further away from and not closer to the mid point of the RBA’s target band won’t result in any knee jerk reaction from the RBA. The key here is that they aren’t a single mandate central bank, like the ECB who only focuses on inflation.

The RBA’s mandate include not only price stability, defined as targeting core inflation over the medium term between 2% and 3%, but also sustainable growth over the medium term and financial stability.

RBA Governor Lowe has said many time since taking the rates that the RBA Board could set policy to drive inflation back to their target quicker if they wanted to but adding that risk associated with doing so would outweigh the benefits.

Those risk are linked to financial stability. Lowering rates and driving up borrowing, would make the system more unstable that the high levels of household debt currently make it, which isn’t in the best interests of the Australian economy over the medium term.

With growth still ticking along above 3% and the unemployment rate trending lower, the RBA has scope to take its time to see if inflation will in fact, eventually accelerate back towards the midpoint of its target band.

The risk however is that if growth does start to fail or unemployment starts to rise due to things like a slowing housing market impacting consumption for example, then the RBA’s outlook will need to adjust accordingly. Until that happens though, the RBA’s outlook is likely to remain unchanged.

David Flanagan

Director - Interest Rate Markets