What Inflation Numbers Mean for Interest Rates

The Australian Bureau of Statistics (ABS), headline consumer price inflation (CPI) grew by .4% in the last quarter and 1.9% for the year. This could likely mean that the RBA will not touch interest rates.

Underlying inflation was not any better, having rose .32% for the quarter and sits at 1.75% for the year.

The inflation target has now come in under the RBA’s 2–3% target for the past 11 quarters.

The market expectation was for an increase of .05%.

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How this affects interest rates

We already know that interest rates are at historically low levels — the problem is that we now have a situation where the economy is largely just an illusion.

Perhaps what indicates this the most is the fact that ‘market goods and services ex volatile items index’ which tracks private sector inflationary pressures grew by only .5% over the quarter.

This indicates that price movements are largely down to government pressures.

Have a look for yourself below:

ABS Inflation Data

Source: Australian Bureau of Statistics

As the ABS states:

The rise in tobacco is due to the effects of the 12.5% federal excise tax increase and the further increase based on the Average Weekly Ordinary Time Earnings (AWOTE), effective 1 September 2018.’

So in essence, a tax of 12.5% on 12.8% of Australians is propping up a large portion of inflation rate.

RBA could even cut interest rates

As such, the RBA will most likely continue to keep interest rates low, flood the market with cheap cash and hope for the best.

Meanwhile, the property market is getting hammered, and could get worse due to a flood of cheap apartments.

Shane Oliver of AMP Capital suggests this could even mean a cut:

We remain of the view that the RBA won’t raise interest rates until late 2020 at the earliest and, given the weakness in inflation, wages and the Sydney and Melbourne housing markets along with the uncertain outlook for consumer spending, the next move being a rate cut cannot be ruled out.’

Grim news indeed for those of us who want sensible monetary policy.


Ryan Clarkson-Ledward,
For Markets & Money

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Ryan Clarkson-Ledward is a junior analyst for Markets & Money. Ryan has degrees in both communication and international business. His priority is bringing you the latest price updates on stocks through ASX updates, as well as supporting Sam Volkering with background research. As part of the team at Markets & Money his aim is to provide unbiased and relevant news for readers. Ryan’s work with Sam is designed to provide research that complements Sam’s analysis for small-cap and technology stocks. Together, their objective is to break through all the jargon and give you the hard facts to inform your investment decision-making. Ryan writes for:

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