Australian Markets Weekly: 24 October 2016

With the RBA a keen inflation targetter, albeit within a flexible medium-term framework, each quarterly CPI reading provides an important update on current inflation trends and is a key input into the Bank’s forecasts.

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Inflation (preview) and Monetary Policy

  • We get the latest Q3 inflation readings in Australia this Wednesday. NAB looks for a +0.7/0.8% q/q headline CPI outcome and a +0.4% underlying CPI outcome, the latter consistent with the RBA’s most recent forecasts.
  • The Governor’s Inflation and Monetary Policy speech last week suggests the Bank’s recent decisions have sought to balance concerns about inflationary expectations becoming too low, financial market stability risks related to the housing market and concern about the lack of momentum in the labour market.
  • At the same time, improvements in commodity prices and the expected reduced drag from the mining investment downturn give some confidence that growth will strengthen over the next two years and inflation return to the 2-3 per cent band, albeit likely to the lower end of the band.
  • The October Board Minutes suggest the November Board Meeting is more live than we previously considered and that a further update of the balance of these forces will be made.
  • September’s Labour Force data would not have eased the Bank’s concerns over momentum in the labour market. Serious concerns over data quality remain, especially the size of the switch between full and part-time employment reported in the month, though this trend has been in evidence now for an extended period and historically the RBA has generally eased during times of declining trends for full-time employment.
  • Given these uncertainties/conflicting pressures, the Board decision may well be to reintroduce a more explicit easing bias pending a closer reading of developments across a number of fronts in coming months.

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