Speculation that the likelihood of rising March quarter inflation data would signal the prospect of interest rate rises has predictably once again fallen well wide of the mark, an economist has said.
Inflation is significantly lower than economists expected, further justifying the Reserve Bank’s decision to keep interest rates at record lows.
According to new data from the Australian Bureau of Statistics, headline inflation rose just 0.6 per cent over the March quarter to 1.1 per cent annually, which is well down on the 0.9 per cent rate recorded over the December quarter and the second consecutive fall in the series.
“Speculation that the likelihood of rising March quarter inflation data would signal the prospect of interest rate rises has predictably once again fallen well wide of the mark,” Dr Andrew Wilson, chief economist at Archistar, said.
The underlying inflation rate also fell over the March quarter, down from 0.4 per cent to just 0.3 per cent reinforcing the ongoing chronically stagnant state of prices growth despite a reviving economy
“The outlook for interest rates clearly remains subdued, and likely to remain at current levels for years – and beyond the current expectations of the RBA,” Dr Wilson said.
Economists had largely predicted headline inflation to add 0.9 per cent in March, while underlying inflation was tipped to expand by 0.5 per cent.
The ABS pointed out that the introduction, continuation and conclusion of a number of government schemes remained a factor in the March quarter, clearly seen in the price falls for new dwellings.
“The fall in new dwelling prices was due to the impact of the federal government’s HomeBuilder grant and similar grants by the Western Australian and Tasmanian state governments,” head of prices statistics at the ABS, Michelle Marquardt, said.
“Without the offset from these grants, the price of new dwellings would have risen, reflecting increases in materials and labour prices in response to strong demand,” Ms Marquardt noted.
Overall, the largely unexpected data is seen to put a stop to talk of an earlier than planned interest rate hike.
However, CreditorWatch doesn’t expect the figures to faze the RBA or move their monetary policy position.
“The RBA will naturally analyse the detail and composition of the result. In the short term, though, it is less about interest rate decisions and rather about the RBA will inject further monetary stimulus into the Australian economy. That is the short-term ‘watch this space’,” said Harley Dale, chief economist at CreditorWatch.
“We need faster inflation, which is ironic given how many years (decades) we spent fighting high inflation. Wages growth is key and we have yet to see signs of a re-emergence of life in that key metric,” said Mr Dale.
At its last board meeting, the RBA reaffirmed that it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.
“For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest,” it said.
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Article by Maja Garaca Djurdjevic on 29 April 2021 at nestegg.com.au