MNI: RBA's Underlying Forecasts Rest On Q/Q Results

MNI (SYDNEY) - The Reserve Bank of Australia will place more weight on the quarter-on-quarter trimmed mean CPI, which showed only a 10-basis-point fall in Q3 to 0.8%, and less emphasis on the 3.5% y/y result, when formulating its next set of forecasts and considering whether inflation is sustainably returning to target, former RBA economists told MNI. 

John Simon, adjunct fellow at Macquarie University and head of the economic research department at the RBA between 2014-2024, said the Reserve's focus is on its forecasts of inflation, "for which the quarterly number is more important."

"In terms of updating its view, only the q/q contains new information, the other three quarters in the y/y will already have been incorporated into forecasts and its analysis of the economy," he told MNI. "Then you want to look at how the most recent quarterly number compares to what it expected - that is the truly new information."

The RBA will view this week's Q3 CPI print, either y/y or the quarterly result, "neither here nor there," he said. "Look at how the q/q differed from what was expected."

FRESH FORECASTS 

Tony Richards, senior advisor, central bank digital currency at Digital Finance and a former RBA economist, said the Reserve will place more weight on two-quarter annualised trimmed-mean inflation over year ended, which showed an increase in August's Statement on Monetary Policy. (See chart)  

Governor Michele Bullock has stressed the Reserve wants to be able to forecast inflation returning sustainably back to target before it considers easing. The Board is meeting this week and the RBA will publish a fresh set of forecasts alongside its cash rate decision. 

Richards said the RBA has for a long time placed more emphasis on the most recent quarterly outcomes and that y/y data can be a lagging indicator. The central bank will also take note of the weighted median q/q result, which printed at 0.9% q/q, 10bp higher over Q2 and the market’s expectation, he said, noting it would also have access to estimates of the two measures to an extra decimal place, which can sometimes give a richer sense of the trend in the quarterly numbers.  

Pointing to his recently published paper “The Use of Trimmed-mean Measures of Inflation in Monetary Policy Making: Some Differences between Old and New World Central Banks”, Richards said the RBA was on the cutting edge of gauging inflation alongside the U.S., Canada and New Zealand, noting European countries typically failed to focus on high frequency trimmed mean data sets.

NO EASING RUSH

Justin Fabo, founder and head of research at Antipodean Macro and former head of international financial markets at the RBA, said the q/q result meant the Reserve would be in no rush to ease. 

"Quarterly is more important given it is a relatively smooth series," he said. "The Bank has often referred to six-month-ended annualised inflation too if the data are a bit volatile. Key at the moment is that core inflation is still above target on any measure."