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Higher than expected inflation and a fall in the Australian dollar in 2013 has substantially reduced the possibility of another cash rate cut, according to a leading economist.
Shane Oliver, head of investment strategy and chief economist at AMP Capital, said Australia’s inflation rate rise of 0.8 per cent in the December quarter was roughly double economists’ expectations. This, combined with a 15 per cent fall in the Australian dollar over the last year appears to be playing a role in driving prices higher, he said.
“This is clearly a disappointing outcome and substantially reduces the possibility of another rate cut from the RBA,” Mr Oliver said. “However, while the increase in inflation will concern the RBA, it’s not bad enough to bring on an imminent rate hike either, as the annual inflation rate of 2.7 per cent at the headline level or 2.6 per cent for underlying inflation is still in line with the RBA’s inflation target, and normal volatility may have exaggerated the latest rise in inflation. In fact, excluding volatile items like fruit and vegetables, inflation was just 0.6 per cent in the quarter.”
According to Mr Oliver, sub-par economic growth and "the arguably still too strong" Australian dollar mean it’s too early for the RBA to consider raising interest rates.
Mr Oliver said he remains of the view that the RBA will continue to leave interest rates on hold at 2.5 per cent for ‘an extended period’ before a modest rate hike around September or October.