‘Good enough’ fall in March quarter inflation means RBA likely to pause again next week

After a ‘good enough’ fall in March quarter inflation, RBA governor Philip Lowe and his board are set to keep rates on hold at next week’s meeting.

The Reserve Bank will leave its official interest rate unchanged for the second successive month at next Tuesday’s meeting after a ‘good enough’ fall in inflation in the March quarter.

It’s then on to the key wages data in mid-May to largely determine what happens at the June meeting. Provided there were no signs of a wages surge, June would see a third successive pause.

It obviously would get ‘interesting’ if wages were starting to shows signs of surging above 4 per cent.

The budget, though, coming Tuesday week, is essentially irrelevant to these decisions.

The key data in the March quarter CPI numbers was not the 7 per cent headline inflation number for the year – down from 7.8 per cent in the December year and confirming the RBA’s belief that inflation had peaked in 2022.

But the underlying inflation numbers.

There are two measures. Both fell sharply – one from 1.7 per cent for the December quarter to 1.2 per cent for the March quarter, the other also to 1.2 per cent from 1.6 per cent.

That’s to say underlying inflation for the quarter was ‘just’ 4.8 per cent in annualised terms, down from around 6.5 per cent annualised in the December quarter.

There is no way the RBA under particularly Governor Philip Lowe is going to hike – suggesting both that it ‘got it wrong’ with April’s pause, and that inflation had suddenly re-reared its head – with those numbers.

Now I put just 4.8 per cent in quotation marks, because 4.8 per cent is still too high – it’s way above even the top of the 2-3 per cent RBA inflation target range.

Furthermore, while the direction is encouraging, it is statistically more robust to take the two quarters, December and March, together, to annualise them.

On that basis underlying inflation over the six months to March was more like 5.6 per cent to 5.8 per cent.

RBA governor Philip Lowe. Picture: Brendon Thorne/Bloomberg

That’s obviously somewhat higher; indeed too high. But still coming down and coming down significantly.

Now, why I wrote ‘particularly’ under Lowe has got nothing to do with the embarrassingly shoddy Review into the RBA, which treated both Lowe and the RBA board not just disgracefully unfairly but inaccurately and just stupidly.

My reference was to Lowe’s determination to deliver exactly what the Review demands the – future - RBA should be aiming at. That is, both low inflation and full employment.

What fundamentally drove both Lowe’s so-called ‘no rate hike promise’ and his softer approach to rate hikes over the last year than especially the Fed and RBNZ, is precisely a desire to keep the jobless numbers as low as possible by only slowing screwing down on inflation.

I’ve argued that runs the risk of letting the wages cat out of the bag; and if that happened it would lock in 5-6 per cent inflation. Or worse.

I’m also prepared to concede he might pull it off. And if he does he will be a central banking hero; albeit a hero not recognised in his homeland

So, it all adds up to another pause in a week and after that ‘it’ all then hangs on the wages data.

Originally published as ‘Good enough’ fall in March quarter inflation means RBA likely to pause again next week