RBA preview: “material miss” on inflation erases rate cut bets

EXPECTATIONS

The RBA is widely expected to hold the Cash Rate unchanged at 3.6% tomorrow after the “material miss” (quoting RBA’s Governor Bullock) on inflation. In fact, the Australian Q3 inflation report last week surprised significantly to the upside, with the Trimmed Mean figure (RBA’s preferred inflation measure) printing at 1.0% Q/Q versus the RBA’s 0.6% forecast.

At this meeting, we will get the updated SMP (Statement on Monetary Policy) with new economic forecasts. The near-term inflation forecast is likely to be revised higher given the renewed pressures and improved global economic activity. As a reminder, the RBA’s inflation target is the mid-point (2.5%) of the 2-3% band. The Trimmed Mean CPI Y/Y is now at 3.0%.

STATEMENT

The statement is likely to acknowledge the increase in underlying inflation and reiterate that the decline has slowed. If the central bank adds that there are upside risks to inflation, then it would be a slightly hawkish turn. The RBA is likely to repeat that the outlook remains uncertain and might note that the labour market data was softer than expected (although Governor Bullock dismissed it as volatile).

PRESS CONFERENCE

In the press conferece, Governor Bullock is likely to repeat that future policy decisions will be cautious, and on a meeting-by-meeting and data-dependent approach. She is unlikely to offer much in terms of forward guidance as the data will eventually shape their decisions (although we will likely need notable weakening in the labour market to force them to cut).

Given the market pricing, even some hawkish comments are unlikely to change expectations much, although we should see the probabilities for a December cut evaporate to near zero and push back further rate cut expectations. Click here to read her most recent comments.