Central bank will likely keep the cash rate steady for the rest of this year

Prashant Mehra
(Australian Associated Press)

 

Consumer prices are expected to have inched up in the March quarter, mainly on the back of higher fuel and food costs, taking headline inflation into the Reserve Bank of Australia’s target band for the first time in years.

However, continuing softness in core inflation means the central bank will likely keep the cash rate steady for the rest of this year, economist say.

The Consumer Price Index (CPI) set to be announced on Wednesday is expected to have risen 0.6 per cent in the March quarter for an annual rate of 2.2 per cent, according to a survey of 12 economists.

Underlying inflation, which strips out the effects of volatile price movements, is forecast to have been 0.4 per cent in the quarter and 1.7 per cent over the year.

“While underlying drivers of inflation remain subdued, the March quarter will likely be boosted by a perfect storm of higher electricity, petrol and fresh fruit and vegetable prices,” Citi economist Paul Brennan said.

Citi is forecasting a rise in the headline CPI of 0.7 per cent and a 0.5 per cent rise in underlying inflation.

The gains are expected to be partly offset by sizeable price declines in telecoms, and seasonal price falls in clothing, accommodation and holiday travel costs.

Economists also expect the CPI figures to confirm the slowing consumer demand that has been apparent in recent muted retail sales data, indicating that margin pressure has intensified.

Still, the headline inflation rate is likely to lift to within the RBA’s target band of two to three per cent for the first time since the September quarter of 2014.

However, underlying inflation will continue to be a drag, underpinned by soft wages growth and spare capacity in the labour market.

“Core inflation at 0.5 per cent quarter on quarter will confirm inflation pressures remain subdued, driven in part by soft wages growth which reflects ongoing spare capacity in the labour market,” National Australia Bank economist Tapas Strickland said.

He added that the RBA’s February Statement on Monetary Policy had flagged a likely rate of 0.4 per cent quarter on quarter.

The quarterly inflation data – due to be released by the Australian Bureau of Statistics on Wednesday – generally has a short-term impact on the Aussie dollar, but is not expected to change the RBA’s thinking on the cash rate.

While strong housing price growth has held back the central bank from cutting rates further, the sideways movement in core inflation will likely mean rate rises are also off the table, according to Commonwealth Bank economist Gareth Aird.

“We think that the RBA remains on hold deep into 2018,” he said.

“The risk, in our view, still lies with further easing, particularly if the housing market falters.”

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