Will Australia CPI Let the RBA Keep the Pause?

Australia’s CPI figures for the first quarter will be pivotal for what the RBA does next. Given what happened in New Zealand with their CPI, there is likely renewed interest in the Australian figures this time around. There have been some other events that have buffeted the AUD, and the inflation outlook could be an inflection point for the pairs.

The RBA has had two sessions of pauses, arguing that inflation will be coming down. We should remember that the last time Australia published its CPI, it was a surprise acceleration, prompting speculation there would be continuous hiking like what we’ve seen in New Zealand. But, the RBA was more worried about the liquidity situation and took a decidedly more dovish stance. Presumably they were betting on inflation coming down these past three months.

How long is it still called a pause?

In New Zealand, inflation did come down over the period. But the RBNZ has been much more aggressive in getting it down, and the expectation is that what the central bank did would have an effect. In that case, Australian inflation might be lower, but not to the same amount as it was in New Zealand.

The consensus is that Australia’s inflation will come down to 6.8% from 7.8% recorded in the prior quarter.

The RBA has said it was “pausing” rate hikes, suggesting that if the data merited it, then more hikes would be coming. The signal is that the RBA hasn’t reached its top rate where it would be expected to “hold” rates. Therefore, if inflation comes in a bit hot this time around, another hike from the RBA wouldn’t be a change from its stated position.

Getting the market’s outlook in line

The market, on the other hand, is pricing in not a pause but a hold; and even a cut in rates later this year. The expectation is that inflation will come down, just as the RBA expects it to. But that there will be a downturn in economic activity sometime in the winter that will necessitate rate cuts in late spring.

So far, China’s economic recovery has been buoyant, but not as fast as some might have hoped. While the world’s largest manufacturing nation has been lifting restrictions on imports of raw materials from Australia, the key exports have been suffering in price. Iron ore in particular, which was driven higher on hopes of China’s reopening, has been drifting lower since the middle of March.

Looking internally

While a lack of exports can keep downward pressure on the Aussie, the RBA itself is facing a review of its practices that could cause it some distraction. One of the proposals is to split the board, to separate monetary policy from banking supervision. Another proposal that could get markets a little worried is that the RBA moves from maintaining price stability to focusing on net income growth. The uncertainties around those eventual changes could cause a little hesitancy among investors.

Then there is the issue of the new Budget, which is expected to be released a few days after the next RBA meeting. With increased spending, it might incline the balance towards more RBA hiking.

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