MNI DATA PREVIEW: Risks, Implications of Australia Q4 CPI

By Sophia Rodrigues

     SYDNEY (MNI) - The money market is eagerly awaiting Australia's fourth

quarter inflation data to push up bets for Reserve Bank of Australia's cash rate

hike if the outcome matches or surprises on the upside.

     However, irrespective of the outcome, the market may be too optimistic in

its current pricing for an RBA hike and even an upside surprise doesn't mean a

hike is likely in May or at least until the end of the year.

     The Australian Bureau of Statistics (ABS) will release the data at 11:30

hours local time Wednesday (0130 GMT).

     MNI median forecast is for a 0.7% q/q rise in headline CPI, leading to an

acceleration in y/y CPI to 2.0%. Such an outcome would be in line with the RBA's

forecasts as they expect solid contribution from fuel and vegetable price gains.

It shouldn't lead to re-pricing of rate expectations.

     Neither should a higher outcome. 

     The clearest reason why any upside surprise may not be material can be

found in the view of JP Morgan economists. They expect headline CPI to rise 1.0%

q/q and yet do have not any RBA hike in their forecasts.

     Significantly, JP Morgan economists also expect the trimmed mean to be

higher, but do not see that as a threat to the inflation outlook. Their

reasoning is that all of the strength in food, fuel and tobacco will not be

trimmed out.

     So instead of an upside surprise, it's a downside surprise -- both on

headline and underlying CPI -- that may be material for the RBA's cash rate

outlook.

     Any outcome on y/y headline CPI below 2.0% could have a

larger-than-expected impact on future inflation readings because of its

influence on wage setting. That could be a strong reason for the market to price

out bets on an RBA hike.

     A downside surprise on underlying inflation is also equally important, as

that would just extend the timing for the RBA to meet its inflation target. The

RBA has consistently said patience remains its strategy that could change if

inflationary pressures continue to look subdued.

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

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