Economic Insights

Economic Insights

Australian inflation rate continues to stay at lower band of Reserve Bank of Australia’s (RBA) target

The Australian Q2 CPI reported an actual figure at 0.5% q/q and 1.2% y/y, slightly lower than the market consensus.

Source: Bloomberg

Click the image to enlarge

 Source: Bloomberg

Click the image to enlarge

The underlying CPI in the middle of the year stands at 2%, which is in the lower band of the RBA’s annual inflation target of 2-3%. With that said, the ample upper band’s space still offers the RBA enough room to cut the interest rate if they wish to, although I do not think it will happen in the coming RBA minutes in August because:

1. the RBA needs to examine the real effect of the rate cut and stimulus they have implemented so far this year
2. the Q2 inflation has not deteriorated to a drastic extent

However, I do expect that there might be one more rate cut from the RBA towards the end of the year due to the external factors such as

1. the Euro Zone’s turmoil
2. China’s soft growth rate

The International Monetary Fund (IMF) commented that the downside risk for China would be huge due to the economy is over-replying on the investment. It echoes China’s Premier Wen Jia Bao’s statement that domestic consumption needs to be improved, and high property price is a major threat to spur the consumption.

Source: Bloomberg

Click the image to enlarge 

The relatively high Aussie currency causes the import price to deflate as well. With that said, the actual inflation could be higher if the Aussie dollar trended lower later on due to the global “risk off”. Many analysts around the world forecast that the Aussie dollar should be traded near the parity level against the greenback. Thus, I believe the RBA will definitely put it into their consideration for monetary policy.

Also, non-tradable inflation still stays high at 3% and which mainly contributed by the domestic service sector.

Euro Zone’s debt situation worsens further

Spain’s 10-year sovereign bond yield climbed higher although Spanish and German officials gave “unjustified” call for the current yield because it does not reflect the current economic strength. Spain really runs out of cash to provide enough support to recapitalise its banking sector, plus more regions in the country are asking for bailout, thus I expect a sovereign bailout request may be just a matter of time.

For Greece, some EU officials are extremely dissatisfied on the effect that Greece put to fulfil the agreement when the bailout was granted to them in the past two years, and further reform would be expected. In the latest development, Greece has just decided to sell the Agricultural Bank of Greece S.A.

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