Curve Daily Commentary, April 23, 2015

Inflation in Check

Yields RiseYesterday’s quarterly inflation report from the ABS confirmed that inflation remains in check in regards to the RBA’s target band and their forecasts.

The headline rate of inflation was a touch higher than expected at a still soft 0.2% which saw another decline in the annual rate from 1.7% to 1.3%. While this is well below the RBA’s target band, it was always expected to be as the lower fuel prices, which were down 12.2% over the quarter, flowed through. Fresh fruit and vegetables were the other noticeable decline, down 2% which health and education were once again on the upper end of the scale when it came to price rises.

The core rate of inflation remained much more stable with the trimmed mean and weighted median both rising 0.6% over the quarter. The increase the the annual rate of core inflation edge higher from 2.3% to 2.4%, still comfortably within the RBA’s target band.

The continued benign inflation outlook is unlikely to have a huge bearing with inflation to remain well within the RBA’s target band over the RBA’s forecast period. The CPI data also rounds out the major data releases ahead of the RBA’s May board meeting, with the remaining data to be release between now and then unlikely to be dramatic enough to impact on monetary policy discussions.

The question is now for the RBA and whether or not they want more time to asses the ongoing impact of their previous move, also allowing the government to present this years budget, or of they think more needs to be done, resulting in a cut in May. Market pricing has moved substantially over the past week with only one cut fully priced and a second decrease at 60% chance. Only a week ago the market had two cuts fully priced and a third cut a 50/50 proposition.