Australia’s economy is barely growing but the RBA doesn’t look like it’s ready to cut rates just yet

• Australia’s latest inflation figures were once again low — the headline figure rising just 0.7% in the December quarter — but largely in line with what the Reserve Bank of Australia (RBA) had been forecasting.
• While consistently low inflation point to “underlying problems” in the economy, according to Indeed economist Callam Pickering, the RBA is unlikely to cut the official interest rate from 0.75% at its February meeting next week.
• Instead just 10% of economists are expecting a cut, with the Commonwealth Bank anticipating the central bank will wait until April before making its next move down.

The chances of a February interest rate cut are looking slim.

The latest inflation numbers — one of the lead indicators of how fast the Australian economy is growing — while low are largely consistent with what the Reserve Bank of Australia was forecasting.

“The Australian December quarter Consumer Price Index showed headline inflation rising by 0.7% over the with annual inflation up by 1.8%, a little stronger than market expectations of 1.7% year on year growth,” AMP Capital economist Diana Mousina said in a note issued to Business Insider Australia.

“[It] is pretty much in line with the RBA’s latest forecasts which takes the pressure off the RBA to cut the cash rate at its next meeting in February.”

The view that the official interest rate will be kept at 0.75% is broadly shared by the country’s economists with just one in ten expecting a rate cut next Tuesday, according to Bloomberg’s economist survey.

“Market expectations for a February rate cut have decreased to only 10% after the inflation data, from around 25% yesterday,” Mousina said.

Like always, the inflation figures were a mixed read. Tobacco prices rose 8.4% in the quarter due to the annual tax hike coming into effect and contributing nearly a quarter of the inflation figure. Equally fuel rose more than 4.5%, while the ongoing drought put a rocket under fresh produce prices. Christmas discounting meanwhile helped offset inflation growth.

“Clothing prices fell with a 2.5% fall in women’s clothes the major contributor. Sale events during the quarter were cited as a key reason for lower clothes prices – no doubt the Black Friday sales played a part here,” Commonwealth Bank chief economist Gareth Aird said in a separate note.

The expectation the RBA will hold off from another rate cut comes despite ongoing weakness in the Australian economy.

“Persistently low inflation speaks to deep underlying problems in the Australian economy. Problems such as low wage growth and high rates of underutilisation that have persisted for a number of years,” Indeed Asia-Pacific economist Callam Pickering said, noting he expected little improvement without further stimulus. “While headline inflation may push above 2.0% in coming quarters due to one-off events, these problems don’t appear to be going away. Core inflation will remain low for the foreseeable future.”

Aird said the Commonwealth Bank now expects two cuts this year, one in April and another in August, to take the cash rate to 0.25% — effectively the lowest it can go.

However, with unemployment unlikely to move lower, and the RBA almost out of rate cuts, the federal government may have to step in sooner rather than later to keep the economy ticking along.

Source: BusinessInsider