RBA worried about low inflation

Tuesday, May 17 2016

Australia's recent dip into deflationary territory is unlikely to have been a one off and could prompt further interest rate cuts this year, the Reserve Bank has signalled. According to the minutes from its May meeting, where the cash rate was cut to 1.75% on budget day, the RBA board was briefed about "ongoing inflation trends" and that the outlook could be lower for longer. Referring to the March CPI result where inflation went backwards by 0.2 per cent, the board was told that the data "were less subject to measurement error than many other key data series".

"Moreover, the lower-than-expected CPI outcome could not be explained entirely by temporary factors" such as lower fuel prices and that the weakness in cost pressures "had been broadly based". The RBA has also signalled that the outlook for lower inflation had the potential to further dampen wages growth, even though employers in general appear unwilling to make offers of wage growth below 2 per cent. "But if inflation was to be persistently lower than previously forecast, it was possible that in time this could be reflected in lower wage growth," the RBA added.

The minutes also highlighted a stabilising but soft outlook for the labour market with employment growth slowing in the first quarter of 2016. "Employment would continue to grow but at a somewhat slower pace than had been evident over the previous year," the minutes warned. The RBA also singled out low wage growth as contributing to "heightened job insecurity" which it said "may be relevant to the current Australian experience".

Aussie is currently being traded around 0.7350 area. Pair is likely to find support around 0.73 handle and resistance above 0.74 level. Later today, in the US session, CPI, Building Permits, Housing Starts and Industrial Production figures will be released.

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