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Economists See Strong Chances of Rate Cut in Australia

Analysts blame higher petrol prices for rise in inflation.Analysts blame higher petrol prices for rise in inflation.

Investors around the world have dumped bonds in favor of equities in recent months on expectations that inflation will rise, but in Australia that trade is facing a first reality check when inflation data is released on Wednesday.

Analysts expect the Australian Bureau of Statistics’ release of 2016’s fourth-quarter inflation to show a 0.7% increase, taking yearly headline inflation to 1.6%. This would be up on the previous quarter’s 1.3% figure, with higher petrol prices behind the increase, aunews24.com reported.

But core inflation–which strips out volatile items like petrol prices and which the Reserve Bank of Australia pays more attention to–is expected to remain stuck at worryingly low levels, with economists predicting a slightly higher quarterly rise of 0.5% but an unchanged annual increase of 1.5%.

That would keep both core and headline inflation well below the RBA’s 2-3% target band. Australian inflation has been lower than 2% since late 2014. It is, Commonwealth Bank chief economist Michael Blythe said, “the longest period of sub?target inflation since the late 1990s”.

This poses ongoing risks. “When inflation rates are low, you don’t need much of a negative shock to end up in deflation,” Blythe says. “You only have to look at the problems of places like Japan to see (the problems with) that issue.”

 

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