Economy

Will the RBA make us all winners on Cup Day?

Mortgage One - Wednesday, October 26, 2011

Annual headline inflation is now 3.5%yr but at 2.5%yr, the average annual underlying inflation rate is at the mid-point of the RBA's 2 to 3% target band.

The ABS have made, revisions relating to changes in seasonal adjustment and the result has seen the Q3 inflation report clearly change the inflation story. The ABS past estimates had been overstating Australia's inflation position. The Reserve Bank will welcome this outcome. The RBA Board Minutes for August forecast annual core inflation to print 3.25% for both 2011 and 2012. The ABS’s reversions have handed the RBA with actual core inflation of 2.47% for the year to September 2011 with a benign fourth quarter estimate of around 0.5%qtr reasonable given the slowdown in the economy. That will allow the Bank to lower its inflation forecast for 2011 to 2.25% with a similar outcome likely in 2012.

Given the Governor's recent statement that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary”; it now seems a good bet that we will see a rate cut by the end of 2011. In fact, given the RBA's previous record of moving rates every November for the last five years, and given the mounting case for a rate cut, we would say that the best each way bet on Cup Day will be that the RBA will make all Aussie’s winners with a 0.25% rate cut. It may just be the RBA that stops the nation just before the horses bolt at Flemington.

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