ING Bank’s response to today’s inflation data from Australia:
- If you want a reason to keep rates unchanged at the August 6 meeting, today’s core numbers somewhat support the “let’s give the economy the benefit of the doubt” argument.
- The decision taken in August is certainly more balanced today than it was yesterday.
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However, for us, the evidence that inflation, even if it is trending down (which is debatable) is moving very slowly, is more convincing.
- In addition, another strong retail sales figure in June (0.5% m/m after May’s 0.6%) will give us a picture where domestic demand is holding up too well to allow for a satisfactory decline in inflation to the RBA’s target range over the medium term.
- We still favor a 25 basis point rate hike on August 6 to raise the cash rate target to 4.6%.
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The initial market response to today’s data was a sharp weakening of the Australian dollar, likely due to the underlying inflation numbers. Markets, which had been pricing in a 25% chance of an August rate hike, have now priced in again. This seems like an overreaction to today’s numbers, but perhaps if the market wasn’t expecting a rate hike, the RBA would be less willing to surprise them…? We’ll find out soon enough.
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I would disagree. I think today’s inflation data gives the RBA ample reason not to raise interest rates next week. The bank is scheduled to meet on August 5-6.
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ICYMI data:
- Australia’s core inflation in Q2 rose 0.8% q/q (1.0% expected)
- AUD/USD fell below 0.6500 after core inflation came in lower than expected
AUD/USD at around 0.6495
This article was written by Eamonn Sheridan on www.forexlive.com.
