Inflation spike sinks chances of February rate cut

31 January 2020

After solid unemployment figures recently, surprise rises in inflation has snuffed out the likelihood of a Reserve Bank rate cut next week.

Economists were predicting a 0.6 per cent increase to the headline inflation rate but the figure came in at 0.7 per cent for the December quarter.

That pushed the annual inflation rate up to 1.8 per cent.

Despite the chances of a rate cut next week all but disappearing off the result, economists still think a further full rate cut is likely by mid-year.

One such economist is NAB’s Kaixin Owyong.

“We continue to see the RBA cutting the cash rate twice this year, pencilling the first cut in to 0.5 per cent in February, although we acknowledge there’s a risk the RBA may wait a little longer to ease given the recent tick down in unemployment,” she told Australian Financial Review.

ANZ senior economist Felicity Emmett also gave her thoughts to AFR, saying the inflation result gives the RBA some flexibility and breathing space regarding interest rates.

“Taken altogether, this cements our view that an RBA move next week is materially less than a 50 per cent probability,” she said.

Rental costs for the December quarter remained unchanged across the country creating a drag on the inflation figures, with food, fuel and alcohol being the strongest drivers of the rising inflation.

For now, it looks like interest rates will remain at 0.75 per cent when the RBA meets next week.


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