Synopsis:

MUFG analyzes the recent Australian CPI data and assesses its implications for the Reserve Bank of Australia's (RBA) upcoming policy decisions. Despite a slowdown in inflation, rates remain higher than the RBA's projections, suggesting potential adjustments in the central bank's approach in the near term.

Key Points:

• Recent CPI Data: Australia's headline inflation decreased from 4.1% year-over-year (YoY) in Q4 to 3.6% YoY in Q1, while the trimmed mean inflation, RBA’s preferred measure, dropped from 4.2% YoY to 4.0% YoY. Both figures exceeded market consensus by 10-20 basis points, indicating a slower deceleration in inflation than anticipated.

• RBA’s Inflation Forecast Adjustments: Given the recent data, the RBA is likely to revise its H1 2024 inflation forecasts upward in its upcoming Statement on Monetary Policy (SMP) on May 7. The adjustments could be at least 25 basis points higher than previous estimates, reflecting persistent inflationary pressures.

• Policy Implications: The persistence of higher inflation rates may compel the RBA to delay its timeline for bringing inflation back to its target range of 2-3%. This situation reduces the likelihood of rate cuts in the near term and may lead the RBA to adopt a more hawkish stance at its May 7 meeting.

• Governor Bullock’s Remarks: RBA Governor Michele Bullock's recent comments underscore the central bank's low tolerance for inflation surprises and its cautious approach towards returning inflation to the target band. She has indicated that both rate cuts and hikes remain possibilities, depending on economic conditions.

• Impact of Mortgage Rollovers: The ongoing wave of mortgage rollovers, which began in March and peaks in June, is another critical factor for the RBA. The central bank is expected to monitor the effects of these rollovers on household finances closely before making further policy adjustments.

• Rate Hike Prospects: While a rate hike seems unlikely in the immediate future due to the timing of mortgage rollovers and their potential impact, MUFG suggests that a rate cut in November is more probable than an increase, given the current economic landscape.

Conclusion:

MUFG anticipates that the RBA will maintain a cautious but hawkish policy stance in the short term, driven by higher-than-expected inflation figures and the need to carefully assess household financial stability amid significant mortgage rollovers.