Economist tips rate cut

Satff Reporter

A revision to underlying CPI by the Australian Bureau of Statistics could encourage the Reserve Bank to reduce its tightening bias to a more neutral stance, one chief economist has claimed.

After reviewing the methodology for the overall CPI in 2010, the ABS found an increased number of expenditure classes to be seasonal and this has affected seasonality in the underlying CPI.

June quarter CPI is now estimated to have risen by 0.6 per cent (previously 0.9 per cent), to be 2.5 per cent higher over the year (previously 2.7 per cent).

“Based on yesterday’s adjustments by the ABS, our forecast projections now imply that core inflation will remain between 2.5 per cent and 2.75 per cent until 2013; this is much softer than our previous forecasts, which showed the core inflation rate accelerating to the top of the target band by the end of 2011 and remaining elevated for the remainder of the forecast horizon,” NAB chief economist Alan Oster said.

“Prior to the recent adjustments, we expected the RBA to keep the cash rate on hold for a considerable time before increasing by 25 basis points in May 2012. We now expect that the next interest rate rise will be delayed until November 2012. That still looks necessary to address above 3 per cent inflation in 2013 – a forecast that has not changed.”

Risks to the near-term interest rate outlook are clearly skewed to the downside, Mr Oster said.

“Recent global jitters and weak global data have clearly hurt confidence and further volatility would hurt global prospects. There are also clearly event risks in Europe. That could flow on to further reduce confidence locally. On top of that potential the local economy continues to struggle with restructuring issues with a surprisingly soft labour market,” he said.

“With near-term inflation expected to fall comfortably within the RBA’s target band, there are some triggers that may prompt a near-term rate cut; specifically, if the unemployment rate rises to above 5.5 per cent.”

Satff Reporter

A revision to underlying CPI by the Australian Bureau of Statistics could encourage the Reserve Bank to reduce its tightening bias to a more neutral stance, one chief economist has claimed.

After reviewing the methodology for the overall CPI in 2010, the ABS found an increased number of expenditure classes to be seasonal and this has affected seasonality in the underlying CPI.

June quarter CPI is now estimated to have risen by 0.6 per cent (previously 0.9 per cent), to be 2.5 per cent higher over the year (previously 2.7 per cent).

“Based on yesterday’s adjustments by the ABS, our forecast projections now imply that core inflation will remain between 2.5 per cent and 2.75 per cent until 2013; this is much softer than our previous forecasts, which showed the core inflation rate accelerating to the top of the target band by the end of 2011 and remaining elevated for the remainder of the forecast horizon,” NAB chief economist Alan Oster said.

“Prior to the recent adjustments, we expected the RBA to keep the cash rate on hold for a considerable time before increasing by 25 basis points in May 2012. We now expect that the next interest rate rise will be delayed until November 2012. That still looks necessary to address above 3 per cent inflation in 2013 – a forecast that has not changed.”

Risks to the near-term interest rate outlook are clearly skewed to the downside, Mr Oster said.

“Recent global jitters and weak global data have clearly hurt confidence and further volatility would hurt global prospects. There are also clearly event risks in Europe. That could flow on to further reduce confidence locally. On top of that potential the local economy continues to struggle with restructuring issues with a surprisingly soft labour market,” he said.

“With near-term inflation expected to fall comfortably within the RBA’s target band, there are some triggers that may prompt a near-term rate cut; specifically, if the unemployment rate rises to above 5.5 per cent.”

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