- Michael Workman, a senior economist at Commonwealth Bank
The Australian Dollar advanced and any chances of an interest rate cut by the Reserve Bank of Australia were dissipated after December quarter headline inflation beat market's expectations. According to the Australian Bureau of Statistics, consumer prices climbed 0.4% from the third quarter and 1.7% from a year earlier. Economists, however, had predicted gains of 0.3% and 1.6% respectively. Prices for tobacco and holiday travel contributed the most to the inflation increase, whereas petrol, telecoms and fruit showed sizeable declines. Moreover, the disinflationary pulse from declining oil prices is far from over. Last week national petrol prices plunged over 5% in the biggest decrease since late 2008.
Weak inflationary pressure and an economy with spare capacity led the central bank to keep its cash rate unchanged at 2% in December. However, turmoil in global financial markets and concerns about China's hard landing, Australia's key trading partner, have forced investors to bet on at least one more rate cut. Interbank futures imply very little chance of an easing a the RBA's next policy meeting on February 2. However, a 25-basis point move to 1.75% is almost fully priced in by August. As a commodity-reliant economy, the recent plunge in oil prices and resultant weakness in the Australian Dollar helped exports to rise sharply and the central bank hopes to spur demand with low interest rates.
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