Australian Markets Weekly – Implications of low inflation for monetary policy

Today’s weekly focuses on what the low inflation environment means for monetary policy, and what discretion the RBA has in “looking through” low inflationary periods.

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Implications of low inflation for monetary policy

  •  Today’s weekly focuses on what the low inflation environment means for monetary policy, and what discretion the RBA has in “looking through” low inflationary periods.
  • In summary, we posit that while the RBA has considerable discretion in tolerating inflation below target, that tolerance is bounded by the credibility of the inflation target and the nature of the shocks to the inflationary process. For one-off shocks the length of time that the RBA is able to “look through” subdued inflation is dependent on inflation expectations – which should heighten the sensitivity of this release for markets.
  • For markets, the past week has been dominated by comments from key US Fed speakers that have alerted the market that the upcoming June 15 FOMC meeting is “live”. Markets are currently pricing around a 60% chance the Fed lifts rates by July, and while June is live, the closeness of the 23 June UK Brexit referendum poll tips the balance to July in NAB’s opinion.
  • Domestically the focus this week turns to economic activity and growth with key investment partials ahead of GDP next Wednesday, with Construction Work Done Wednesday and New Private Capital Expenditure on Thursday, both expected to be lower in the quarter.
  • Also for the market this week is remarks from RBA Governor Stevens; not title is as yet available.

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