LUCI’S CALL: Sticky inflation may delay RBA rate cut

Inflation is not coming down as quickly as we expected, or the Reserve Bank of Australia would like, and as such we now expect the cash rate to remain on hold until the November Board meeting.

We’ve pushed the timing out from our previous call for a rate cut to come at the September meeting. 

While inflation continued on a downward path in the three months to March, headline CPI and the key trimmed mean measure both printed at 1.0 per cent in the quarter against Westpac Economics’ expectation of 0.8 per cent for both measures. 

Headline inflation on a year-ended basis is now firmly in the 3s, in striking distance of the RBA’s 2–3 per cent target range, but the trimmed mean measure is still at 4 per cent. 

In particular, there was strong growth in pharmaceuticals prices and insurance costs - areas which do not suggest that inflation is being driven by strong consumer demand. 

In fact, consumer demand is not strong but these latest inflation numbers, when viewed alongside a somewhat stronger labour market in the March quarter, probably shift the balance of risks that the RBA will be reacting to. 

So they’re going to be on hold for some time yet, not ruling anything in or out, while we maintain our view that there will not be another rate hike. 

For more insights from Luci, including her reflections from a recent trip to visit customers in Europe and the U.S., visit WestpacIQ.