Aussie inflation bets rise even as robust price gains elude

[SYDNEY] The worst of Australia's disinflationary pressures may be behind it if the bond market is to be believed, but robust price gains remain a distant prospect.

With commodities and global fixed-income yields rebounding, bond traders' expectations for the annual rate of consumer price increases over the next five years climbed to 1.9 per cent as of 9 am on Wednesday in Sydney, 30 basis points above the 15-month closing low reached in February, based on so-called breakeven rates.

Although that's stronger than counterparts in the US and Germany, the outlook for price gains Down Under remains near the weaker end of the Aussie central bank's target.

Governor Glenn Stevens has signaled a reluctance to cut the Reserve Bank of Australia's key interest rate from an already record low 2 per cent even as he has conceded that there's scope for more reductions if needed.

While signs of labor market strength have driven unemployment down to a 2 1/2-year low, the RBA has said that subdued wage growth, weak global inflation and a stronger currency are likely to keep domestic price gains in check for the next year or two.

"I think that inflation will be fairly low, but not sufficiently low that it demands a rate cut from the RBA," said Chidu Narayanan, Asia economist at Standard Chartered Plc in Singapore.

"In the absence of actual wage inflation or actual wage growth, there's going to be very little inflationary pressure."

The overnight index swaps market was pricing in just 14 basis points of RBA easing in the next six months, compared with as much as 31 basis points back in January, according to data compiled by Bloomberg. The board's next meeting is scheduled for May 3.

A consumer price index update due Wednesday is expected to show the headline inflation rate held steady at 1.7 per cent in the first quarter from a year earlier, according to a Bloomberg survey of economists.

Core Inflation

While the main consumer price index has picked up since troughing at 1.3 per cent in the first quarter of 2015, other measures that strip out some of the most volatile elements have remained near the bottom of the RBA's 2 per cent to 3 per cent target.

The weighted median index is forecast to remain at 1.9 per cent, while the trimmed mean gauge is set to slow to 2 per cent, according to the Bloomberg survey.

In the inflation swap market, the five-year outlook for annual consumer-price gains was priced at 2.24 per cent compared with as little as 2.06 per cent earlier this month.

The yield on Australia's two-year government bond climbed to 2.08 per cent Wednesday, the highest level this year.

Commonwealth Bank of Australia, the country's biggest lender, said core inflation figures of around 2 per cent would see the RBA maintain a conditional easing bias.

"The inflation pulse is particularly tame at present," CBA analysts including John Peters wrote in a client note last week.

"Some sensitivity analysis suggests that we are unlikely to see inflation return to the middle of the RBA's target band any time soon."

BLOOMBERG