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Stable inflation keeps currency watchers guessing

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Latest inflation data supported ANZ Research’s view further rate cuts are unlikely.

Looking through the statistical noise in recent quarters suggests underlying inflation near the middle of the Reserve Bank of Australia’s 2-3 per cent target band in six-month-ended annualised terms.

Our ‘middle of the road’ inflation forecasts are underpinned by low wage growth keeping a lid on non-tradables inflation and offsetting the impact of the currency on tradable goods.

While aggregate tradables inflation did pop up to 2.9 per cent - a three-year high - the most useful measure of tradables inflation (excluding fuel, fruit and vegetables and tobacco) has increased only gradually to 1.2 per cent year on year.

Also encouraging, consumer confidence rose a solid 4.4 per cent in the week ending 20 July and has retraced the sharp deterioration surrounding the Commonwealth budget, returning to long-run average levels. Weekly home price data also implies a retracement of May-June losses, with home prices at new records.

The timing of the first hike remains somewhat uncertain. At this stage, the tentative outlook for non-mining investment and the labour market and the current high level of the $A suggests the risk remains tilted towards a later start to the tightening cycle than our current February 2015 start date. 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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