The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Since the GFC, Australia’s inflation rate has been trending lower and lower and it has been below the RBA’s target band for some years now. Despite the RBA’s desire for a higher inflation rate, attempts to accelerate inflation through record-low interest rates have failed so far. The latest unofficial measure of consumer inflation suggests the annual rate of consumer inflation is likely to fall, at least in the short term.
The Melbourne Institute’s latest Inflation Gauge index increased by 0.3% during December following a flat result in November and a 0.1% increase in October. On an annual basis, the index increased by 1.4%, down from November’s rate of 1.5%.
Domestic bond yields finished the day lower, largely following overnight leads from US Treasury bonds. By the end of the day, 3-year ACGB yields had shed 2bps to 0.79% while 10-year and 20-year yields had each lost 5bps to 1.22% and 1.64% respectively.
Prices of cash futures contracts moved to harden expectations of another cut in the cash rate target. By the end of the day, February contracts implied a 46% chance of a 25bps rate cut, up from the previous day’s 42% while March contracts implied a 60% chance of another cut, up from 55%. May contracts had a 93% likelihood of a rate cut built in.