Inflation weighs on RBA rate move

Westpac expects lower inflation will provide the Reserve Bank of Australia with an appropriate trigger to cut rates next week.

The major bank is forecasting that headline inflation for the December quarter will print 0.1 per cent, with underlying inflation at 0.6 per cent, pushing annual rates down to 1.6 per cent (from 2.3 per cent in September) for headline and to 2.3 per cent from 2.6 per cent for core inflation.

“Similar expectations for the March quarter (given the sharp further falls in fuel prices over the past month) will significantly change the RBA's inflation forecasts,” Westpac chief economist Bill Evans said.

Westpac expects that core inflation to June 2015 will now print 2.25 per cent (from the RBA’s 2.5 per cent in November) and 2.25 per cent to December 2015 (from the RBA’s 2.75 per cent in November).

“That would mean that the Reserve Bank would be changing its inflation narrative from expecting a move to the top half of the target band to prospects of a shift to the bottom half of the band – a significant turnaround,” Mr Evans said.

“If the RBA has similar views then such a substantial change in the inflation outlook should be accompanied by a policy response,” he said.

While there is always the “barrier” that markets are not expecting a rate cut, Mr Evans noted that “surprise decisions” in recent days by Canada, India and Denmark have got markets talking of an RBA rate cut.

“If the Inflation Report prints according to our forecasts, then markets are likely to warm further towards our February view,” he said.

“Another very important justification for a February move is the current stance of policy as assessed by the shape of the yield curve," he added.

On December 4, Westpac changed its interest rate forecast to expect 25 basis point rate cuts in both February and March.

NAB is also forecasting two further interest rate cuts, of 25 basis points in March and 25 basis points in August 2015.

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