Inflation, job ads may put rate cut on the cards

by Mackenzie McCarty15 Jan 2013

Low inflation and weak job ads data have fueled speculation over a February rate cut.

The TD Securities – Melbourne Institute Monthly Inflation Gauge rose by 0.4% in December, following a fall of 0.1% in November and an increase of 0.1% in October.

In the twelve months to December, the inflation gauge increased by 2.4%, on par with the mid-target annual rate of the past four months.

Contributing to the overall change in December were price rises for automotive fuel, holiday travel and accommodation (seasonal) and rent. These were offset by falls in clothing and footwear, alcohol and tobacco, and meat and seafood.

Furthermore, The number of jobs advertised in Australian newspapers and online fell 3.8% in the same month down to the lowest level in three years, according to ANZ.

A report by Australia & New Zealand Banking Group shows the number of jobs advertised in newspapers fell 0.4% while online ads decreased by 3.9% - the tenth consecutive month of declining advertisement numbers.

Annette Beacher, head of Asia –Pacific research at TD Securities, says the trimmed mean of the inflation gauge increased by 0.1% in December, following a flat result in November, to be 2.2% higher than a year earlier.

“We forecast headline inflation to increase by 0.3% in the quarter, to be 2.3% higher than a year ago, while we forecast underlying inflation to increase by 0.55% in the quarter, lowering the annual rate slightly from 2.5% to 2.3%.

By the end of 2013, Beacher says TD Securities expects underlying inflation to remain close to the mid-point of the RBA 2-3% target.

“The first RBA meeting for 2013 is slated for 5 February, and is likely to be a lively one as the outlook and risks for 2013 are discussed. However, on balance we are of the view that the cash rate should remain at the already record low of 3.0%. Our base case assumes a final 25 basis point rate cut to 2.75% in the coming months, where the triggers could be either disappointing domestic demand growth or a re-emergence of fresh downside risks from offshore.”