Daily Commentary BY THE CURVE TEAM –

Interventions Impacting Inflation

16th of May, 2017

Talks of extending the OPEC production cut is important and not just for markets.

News that the Saudi and Russian oil ministers will do whatever it takes to rebalance the oil markets was the focus of markets overnight. Both ministers at a joint press conference yesterday in Beijing yesterday announced that they have agreed to extend the current production cuts for a further 9 months when OPEC meets next week.

The news drew an immediate reaction with oil surging, taking equities with it. Some of the exuberance faded during the session with oil giving up half its gains. Interest rate markets were less interested, maybe due to the fact that US data once again disappointed, keeping a lid on yields.

I could write much more on the nuances of the oil market and why the productions cuts to date haven’t worked as well as OPEC would have wanted. The more important implication of tinkering the market to control the price of oil is its impact on inflation.

While most core readings of inflation that are used by central banks to set monetary policy exclude energy or volatile items, which often include fluctuation in energy costs, the price of oil is still incredibly important. The price of oil impacts prices throughout the economy via the cost of transportation and production amongst many other things. So it still shows up in core inflation eventually, even if the wild fluctuations of the underlying price changes are not captured.

How this ongoing intervention plays out will have a significant impact on the outlook for inflation and thus the outlook for central bank policies around the globe, including Australia.

Australia’s monetary policy will be in focus today with the minutes from the RBA’s May Board meeting scheduled for release this morning.

David Flanagan

Director - Interest Rate Markets