ABC News | Wed Jul 28, 2010 | 4:24pm AEST
A surprisingly soft inflation number has all but ruled out the chance of an interest rate hike next week. The ABS Consumer Price Index’s headline figure rose 0.6 per cent in the June quarter compared with the previous quarter – that was well below the median analyst forecast of a 1 per cent rise. Of the 21 economists surveyed by Bloomberg the lowest estimate was for a 0.8 per cent rise, while many economists were a long way off the mark, with one forecasting a 1.2 per cent surge. The relatively modest 0.6 per cent June quarter increase leaves headline inflation at 3.1 per cent for the year to June. But the two measures of underlying inflation preferred by the Reserve Bank, which take out the most volatile price movements, rose only 0.5 per cent in the quarter. That meant the rate of underlying inflation was 2.7 per cent for the year to June, well inside the Reserve Bank’s 2-3 per cent target band. St George Bank’s chief economist Justin Smirk says today’s inflation data has taken the chance of a rate hike off the table at the Reserve Bank’s August meeting next Tuesday. "It is without a doubt highlighting that right now the RBA does have clear time to wait, pause and ponder on the global events and just how our own economy is making the shift from being driven by public stimulus and back towards more private investment," he told Reuters. "So, there’s no rate-hike next week."
Longer rate pause
RBC Capital Markets senior economist Su-Lin Ong had been forecasting a much higher result of a 1.1 per cent headline inflation rate for the quarter. She says today’s soft figures may see the Reserve Bank keep interest rates on hold for some time to come. "I think the odds of further hikes have fallen quite substantially given today’s numbers," she told ABC News Online. "We think it’s unlikely the Reserve Bank will hike next week at its August board meeting and there’s a good chance that this pause that we’re seeing in this tightening cycle, that began quite aggressively, there’s a very good chance that this pause becomes extended and the RBA sits on the sidelines for the next few months at least." The Australian Chamber of Commerce and Industry’s Greg Evans says an extended pause is certainly what business is hoping for. "This firmly puts a rate rise in August on the backburner and indeed off the agenda," he said. "We believe that’s unambiguously good news for both business and also consumers,
and we believe it actually lays the bedrock for no official interest rate increases until at least Christmas." A Reuters poll of 19 financial institution economists after the inflation figures were released found all expected interest rates to remain on hold for the third straight month in August, and only two expected a rise in September. Six of those surveyed still expect official interest rates to hit 5 per cent by year’s end, with 11 expecting one more rise to 4.75 per cent, and two expecting no further change in rates this year.
Retailers ‘trim prices’
Su-Lin Ong says the weak price rises, and price falls, were almost across the board, and this surprised market analysts. "There were quite a number of downside surprises in some of the components of CPI," she said. "If you look at the details, there was softness right across the board, with the exception of some increases in the tobacco component that we knew about, as well as health, everything else was very much flat." The ABS figures show food prices fell 0.3 per cent in the quarter (due to a 4.8 per cent fall in fruit prices and a 3 per cent slide in vegetable prices), while recreation became 1.8 per cent cheaper (mainly because of a 6 per cent slide in the cost of domestic travel) and communication costs slipped 0.1 per cent. Alcohol and tobacco rose 5.9 per cent, with tobacco prices surging 15.4 per cent on an increase in excise, while health costs increased 2.2 per cent.
CommSec chief economist Craig James says he was not overly surprised by the result, even though the Commonwealth Bank was forecasting 1 per cent headline inflation in the quarter. "In an environment where retailers are falling over themselves to trim prices in order to get consumers to spend, it would have been difficult to have believed that inflation was still a problem," he wrote in a note. Over the past week retailers Woolworths and Coles (and their related department and electronics stores), as well as Harvey Norman, have been reporting very low inflation, and even deflation, in many goods. Recent comments by Gerry Harvey about the falling cost of electronics have been backed up by the ABS data showing a 6.3 per cent quarterly slump in prices for audio, visual and computing equipment. Inflation was highest in the resources boom areas of Perth and Darwin, largely due to increasing housing costs in Perth. Canberra, Sydney and Hobart had the lowest increases in prices during the June quarter. The Australian dollar tumbled from above 90.1 US cents before the data release to 89.45 US cents by 1:40pm.