18 Feb 2014
Flash: Inflation takes more significance in Australia - RBS
FXStreet (Bali) - Inflation outcomes in Australia will take on more significance from now on, notes Greg Gibbs, FX Strategist at RBS.
Key Quotes
The RBA minutes were largely as expected but may have disappointed a little by not making its desire for a weaker AUD more clear. Nevertheless, they reiterated the message from the policy statement that, "If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.
The exchange rate is modestly higher since the statement up from 78/88 to 90/91. Levels below 90 are probably preferred, some board members appear to like it in the low 80s, but the RBA is unlikely to put specific levels in its official policy statements and indeed be reluctant to do in public speeches."
"The minutes made clear the switch to a neutral stance stating, "If the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates."
The minutes highlighted that the higher inflation outcome led out their discussion. They noted that there is much uncertainty for the outlook ahead. This uncertainty and higher starting point does appear to be a factor taking away further scope to cut, and thus supports AUD and rates.
As such, inflation outcomes this year are likely to be quite important for the RBA outlook as it grapples with understanding underlying pressures. That said, to the extent that they see higher inflation mostly related to the exchange rate depreciation they are likely to be prepared to look through it. Their concern is that some of the inflation may reflect factors such as possible "less spare capacity, enabling retailers or wholesalers to increase their margins." And they note that some of the inflation reflects, "Higher inflation in housing costs, with the cost of new dwellings rising as housing construction picked up". Overall they are not so concerned with near term inflation pressure given the still soft labour market and lower wage outcomes.
The AUD may continue to grind a little higher near term, but the outlook for the economy is still at best trend growth and this will deteriorate if the currency rises far above 90. We expect it will eventually run out of steam and are neutral at this stage. .91/92 levels might be regarded as the sell zone.
Key Quotes
The RBA minutes were largely as expected but may have disappointed a little by not making its desire for a weaker AUD more clear. Nevertheless, they reiterated the message from the policy statement that, "If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.
The exchange rate is modestly higher since the statement up from 78/88 to 90/91. Levels below 90 are probably preferred, some board members appear to like it in the low 80s, but the RBA is unlikely to put specific levels in its official policy statements and indeed be reluctant to do in public speeches."
"The minutes made clear the switch to a neutral stance stating, "If the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates."
The minutes highlighted that the higher inflation outcome led out their discussion. They noted that there is much uncertainty for the outlook ahead. This uncertainty and higher starting point does appear to be a factor taking away further scope to cut, and thus supports AUD and rates.
As such, inflation outcomes this year are likely to be quite important for the RBA outlook as it grapples with understanding underlying pressures. That said, to the extent that they see higher inflation mostly related to the exchange rate depreciation they are likely to be prepared to look through it. Their concern is that some of the inflation may reflect factors such as possible "less spare capacity, enabling retailers or wholesalers to increase their margins." And they note that some of the inflation reflects, "Higher inflation in housing costs, with the cost of new dwellings rising as housing construction picked up". Overall they are not so concerned with near term inflation pressure given the still soft labour market and lower wage outcomes.
The AUD may continue to grind a little higher near term, but the outlook for the economy is still at best trend growth and this will deteriorate if the currency rises far above 90. We expect it will eventually run out of steam and are neutral at this stage. .91/92 levels might be regarded as the sell zone.