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April, 2019 8:54 AM



Australia expected to miss inflation target

Australia expected to miss inflation target

One of the leading indicators for inflation targets has suggested that Australia is nowhere near on track to hit targets for the current quarter as signs of a global market downturn continue.

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By Oliver King 28.01.2019

One of the leading indicators for inflation targets has suggested that Australia is nowhere near on track to hit targets for the current quarter as signs of a global market downturn continue.

Analysts from Westpac, which is one of the most reputable sources for correct inflation predictions, are saying that Australia is going to be some way off the 2-3% target set by the Reserve Bank of Australia (RBA).

In more bad news for the central bank, Westpac is also speculating that the unemployment rate is going to rise. RBA managed to scale it down and use the strength of the US dollar to stimulate the market last year. Alongside this, GDP should also slow in its level of growth. This has been under discussion for some time but appears to finally be taking place.

One of the main factors causing these problems for Australia is the ongoing US-China trade war, which has resulted in the placement of various tariffs on exports and imports of key goods. Australia seems to be one of the nations most affected by this, partly because of its supply chains and how it is a key Western ally in the Asia Pacific region. Many world leaders have thrown around geopolitical statements in the last year, and this has led to some market jitters.

RBA is likely to trim the cash rate, as foretold by several analysts and economists who believe that the central bank will have little choice but to give the major lenders more financial liquidity by changing the rate. However, Westpac maintained that that it does not believe that there will be any change in this regard until near the end of 2020. It suggested that RBA will sit tight and try and follow through with its original intention, which was to raise the cash rate.

Westpac Senior Economist Justin Smirk said that reports and data from the final quarter of 2018 suggested that inflation is only on track to hit 0.3%, a long way from the 2-3% that RBA was hopeful of attaining. This will knock the GDP in turn, pushing growth down to 1.5% from the original 1.9% that Westpac had been predicting.

In the face of such small inflation levels, RBA will now be under intense pressure to resist calls for a cut to the cash rate, as the noise had already been growing prior to the release of Westpac's report. If the banks are unable to maintain a level of growth to combat the losses stemming from the Royal Commission inquiry, then the Australian economy is likely to see even more of a struggle.

The banks have all posted dropping profit margins in the last year, and this means that Australian households and businesses are finding it harder than usual to access the typical credit lines that would normally be available.

This has led to a slowing property market, and if real estate fails to pick up, then the stagnant market will make it even harder to promote inflation and job growth. All these factors make it more likely that the cash rate will have to drop, but a stubborn RBA stance may well pay off in the long run if is it able to turn things around in the first few months of 2019.

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