MNI ANALYSIS: Upside Surprise In Q1 CPI A Game-Changer for RBA

By Sophia Rodrigues

     SYDNEY (MNI) - Australia's first quarter reading of consumer price

inflation is important for the Reserve Bank's monetary policy outlook but market

risk to the outcome is asymmetric, with a higher-than-expected outcome likely to

cause a bigger reaction than a downside surprise.

     The MNI median forecast is for headline inflation, as measured by CPI, to

rise 0.5% q/q, keeping y/y inflation at +1.9% -- the same as Q4. It would mark

14 quarters out of last 15 where inflation was below the RBA's 2% to 3% target

band.

     However, a small upside surprise, such as a reading of +2.0% y/y or +2.1%

y/y, could be a game-changer for the RBA's monetary policy, as it would keep

prospects alive for a rate hike by the end of the year especially given the

further strengthening of the RBA's forward guidance.

     In the minutes of the April board meeting, the RBA included forward

guidance in its statement when it said "that it was more likely that the next

move in the cash rate would be up, rather than down." In recent months, Governor

Philip Lowe made similar comments in his speeches, but the April minutes was the

first time it found a mention in an official RBA statement.

     On the other hand, a downside surprise like 1.8% y/y would merely mean

markets will further pare bets for a hike in November, but would still keep

pricing intact for a hike by May next year.

     --HEADLINE Y/Y CPI KEY FOCUS

     The Q1 CPI data, due to be published by the Australian Bureau of Statistics

at 1130 hours local time (0130 hours GMT), contains several figures that are

closely watched by the market. There is a lot of focus on underlying inflation,

which is roughly taken as the average of trimmed mean and weighted median

measures of inflation.

     But the most important figure is the y/y measure of headline CPI. A higher

outcome here would be important for three key reasons. The first is that it

would bring CPI into the RBA's target band for the first time in four quarters. 

     Secondly, it would boost prospects for wage growth, as headline CPI has a

big influence on wage expectations. An acceleration in wage growth is extremely

important for the RBA's monetary policy because it would eventually lead to

inflation rising towards the midpoint of the target band, and would also boost

household income and thus their consumption.

     Thirdly, a higher outcome on y/y CPI would also be above the RBA's own

expectation and could potentially lead to an upgrade in CPI forecasts when the

RBA publishes the next quarterly Statement on Monetary Policy on May 4. This

would indicate further progress on the RBA's inflation goal and boost the case

for a rate hike. 

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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