Australia CPI Preview: Inflation expected to slow further, although not enough to move RBA’s needle

Posted At: 2024-04-24 09:00

The Australian Monthly Consumer Price Index is foreseen steady at 3.4% YoY in March.
Quarterly CPI inflation is expected to have ticked higher in the first quarter of the year.
The Reserve Bank of Australia is confident the economy would dodge a hard landing.
The Australian Dollar is correcting higher, but is still under bears’ control.

An Australian inflation update takes the spotlight this week ahead of critical United States (US) macroeconomic data. The Australian Bureau of Statistics (ABS) will release two different inflation gauges on Wednesday. The ABS will release the quarterly Consumer Price Index (CPI) for the first quarter of 2024 and the March Monthly CPI, an annual figure that compares price pressures over the previous twelve months. Also, the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia's (RBA) favorite inflation gauge.

The RBA met on March 18-19 and decided to keep the Cash Rate steady at 4.35%. In the accompanying statement, the Board scrapped references to possible rate hikes, triggering an Australian Dollar (AUD) sell-off. The central bank will meet again on May 6-7, and CPI figures will definitely guide such a decision.

What to expect from Australia’s inflation rate numbers?

The ABS is expected to report that the Monthly CPI rose by 3.4% in the year to March, matching the previous annual figure reported in February. The quarterly CPI is foreseen rising 0.8% QoQ and up 3.4% YoY in the three months to March. Finally, the RBA Trimmed Mean CPI, the central bank’s preferred gauge, is expected to rise by 3.8% YoY in March against the previous reading of 4.2%.

Market players built confidence in easing price pressures but have learned the lesson: rate cuts are not a priority for policymakers. Moreover, considering authorities from most major economies, Australia included, believe they can dodge a hard landing. However, officials involved in setting the monetary policy are more worried about trimming interest rates too early than about the impact of tight monetary conditions on the economy. An exception to this rule could be the Eurozone and the European Central Bank (ECB), but that’s a story for another moment.

Back to Australian inflation, the anticipated figures would support the RBA’s decision to hold rates and slowly pave the way for a shift in monetary policy. In the Statement on Monetary Policy released after the March meeting, policymakers stated: “Inflation is falling but is still high. It is important to bring inflation down because high inflation hurts all Australians. The Board’s interest rate decision supports the gradual return of inflation to the midpoint of our 2–3 per cent target range.”

Additionally, inflation is expected to decline to 3.2% in 2024 and continue dropping towards 2.6% by mid-2026, finally reaching the central bank’s target band of 2% to 3%. Policymakers also anticipate wage growth will peak at 4.1% in mid-2024 before gradually declining to 3.2% in June 2026. Finally, economic growth is foreseen to fall from 1.5% to 1.3% in June 2024 before gradually improving towards 2.3% by the end of 2025.

How could the Consumer Price Index report affect AUD/USD?

As usual, CPI readings will have a significant impact on the Australian Dollar (AUD) as the figures will guide the RBA's upcoming monetary policy meetings. The figures would be interpreted as how they could affect the Board's decisions. With that in mind, a higher-than-anticipated outcome would force the central bank to keep interest rates at current levels for longer. Market players do not expect higher rates, but policymakers may try to cool down expectations of soon-to-come rate cuts. Generally speaking, higher interest rates tend to provide support to the local currency. On the contrary, below-expected figures could boost rate-cut expectations, undermining demand for the Aussie.

From a wider perspective, easing inflationary pressures should be understood as better odds for economic progress and benefit the AUD in the long run.

Ahead of the CPI release, AUD/USD trades around 0.6450, recovering from 0.6360, the year-to-date low set this April. The US Dollar (USD) has soared on the back of risk aversion triggered by Middle East woes and decreasing odds for a US Federal Reserve’s (Fed) rate cut in June. The Greenback shed some ground at the start of the week, but its undeniable strength prevails.

Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair offers a limited bullish potential, according to technical readings in the daily chart. The latest recovery seems corrective, given that the pair is losing upward momentum well below bearish moving averages. Furthermore, technical indicators are developing below their midlines with neutral-to-bearish slopes, suggesting AUD/USD may soon resume its slide.”

Bednarik adds: “The pair is currently battling a relevant resistance area, followed by a stronger one at around the 0.6500 threshold. An advance towards the latter won’t affect the dominant bearish case but, on the contrary, provide sellers with fresh opportunities. Near-term support levels come at 0.6400 and 0.6360, while a break below the latter exposes the 0.6320 price zone.”

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

Economic Indicator

Monthly Consumer Price Index (YoY)

The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.