Daily Commentary BY THE CURVE TEAM –

CPI Pushes Out Rate Cut Expectations

30th of January, 2020

Expectations for a February rate cut from the RBA have dissipated following yesterday’s CPI release.

After walking back from a cut in the wake of last week’s employment report, market expectations have drifted even further after the new release. As of this morning, the market has an 8% chance priced in for a move next week and doesn’t have a cut fully priced in until July.

As the main metric, the slight uptick in the headline annual rate of inflation was enough for the market to almost fully discount the chance of a rate cut next week. Thanks to increases in the prices of food, fuel and tobacco, the headline rate rose 0.7% in the fourth quarter, taking the annual rate to 1.8%.

The chart suggests that inflation appears to have bottomed and is heading back towards the RBA’s target band. However, we know that the RBA focuses more closely on core inflation, using the trimmed mean measure to get a better handle on inflation trends.

The trimmed mean measure of inflation, which removes volatile items from both the high and low side, posted its third consecutive rise of 0.4%. It leaves the annual rate of core inflation running conformably below the RBA’s target band and has been little changed for some time. In fact, the trimmed mean has been running below the RBA’s target band for four years.

We now look to next week’s RBA activity, where there will be plenty to digest. We have the Board meeting Tuesday and Governor Lowe’s appearance at the National Press Club on Thursday morning, followed by the Quarterly Statement on Monetary Policy. We should have a pretty clear handle on the outlook for monetary policy by the end of next week.

David Flanagan

Director - Interest Rate Markets