The deflation bogey might not scare RBA

Well that was interesting.

One quarter of headline deflation seems to have caused an outbreak of near panic with a rush of market economists and tipsters suggesting that now that Reserve Bank would simply have to cut interest rates when it meets on Tuesday.

Or maybe not.

Some of the commentary has been quite bemusing in the narrowness of its focus. Yes, the March quarter consumer price index did indeed surprise with a headline fall of 0.2 per cent when the market was expecting a rise of 0.2 per cent.

And the RBA’s “core” inflation measure showed a rise of just 0.2 per cent which resulted in a year-to annual inflation rate of 1.7 per cent – below the bank’s target band of two to three per cent over the cycle.

Also read: Australian consumer prices unexpectedly fall

The italics are mine. Keeping inflation in that band over the broader economic cycle allows for it dipping below and rising above from time to time without the RBA firing distress flares.

That said, the RBA won’t like this week’s figures. It is mindful of the global deflationary danger and would like to keep inflation in the band. It’s particularly the case when the March quarter includes a seasonal lift from higher education and pharmaceutical costs.

But does that mean the RBA has to cut rates on Tuesday? I don’t think it’s anywhere near as clear-cut as some argued with knee-jerk speed yesterday.

The surprise was enough for National Australia Bank’s economics team to change its interest rate prediction from no change to a 25 point cut. That saw the NAB lumped in with other banks as evidence of monetary Armageddon. That’s not really how the NAB team was calling it.

Beyond the bare headline, the NAB is far from certain the RBA will cut, rating it as only as “a 55%/45% chance” and saying that “it is really a fine judgment” with the bank remaining generally optimistic about the near-term performance of the Australian economy and employment market.

So a rate cut remains less than a sure thing.

The NAB comments are worth weighing as they come from a team that hasn’t been part of the persistent “we-want-a-rate-cut-and-we-want-it-now” chorus, the mob that has been predicting that we would be having another rate cut any day now – and have been predicting it for 11 months without success.

The reality is that the overall economy has been showing signs of picking up, as demonstrated by NAB’s monthly business conditions survey.

Employment growth has been reasonably good and there are even indications that non-resources business investment is stirring.

Also read: $A still reeling from inflation slump

At the same time, the RBA and APRA are breathing more easily after managing to blow the froth off the top of the east coast housing boom – so why would our central bank want to risk firing it up again?

And then there’s the speech governor Glenn Stevens gave just last week, warning that monetary policy had done about as much as it can for economic stimulus and suggesting it was a good time for governments to do more instead, specifically mentioning the virtue of sensible investment in infrastructure.

Aside from the RBA board meeting, Tuesday also is federal budget day with some tipping Turnbull & Co in electioneering mode could well start throwing some infrastructure billions around.

So while lower-than-expected inflation makes it easier for the RBA to cut rates if it wants to, yesterday’s figures don’t mean it has to.

What will matter more to the board is the bank’s outlook for inflation, something we won’t see until Friday with the publication of the quarterly statement on monetary policy – after the budget.

 

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.