Inflation spike dims RBA rate cut chances

Link to article

Australia’s third quarter CPI figures exceeded forecasts. Headline inflation arose to 1.3% from 1%, beating the forecast 1.1%. Core inflation was 1.5%, in line with the RBA’s forecast and remains under the 2 – 3 % target. Non-tradeables prices rose by 0.5%, increasing the annual rate from 1.6% to 1.7%. The most significant price rises were for fruit and vegetables followed by electricity. These rises were partially offset by falls in fuel and communication. On release of the data, the Australian dollar rallied to as high as $US0.77. Financial markets have also priced in a reduced chance of a rate cut from 48% to 32%.

How does this relate to the HSC syllabus?

  • An increase in inflation above expectations means that price levels rose more than expected (HSC Topic 3 – Economic Issues). These price increases have been significantly due to the rising costs of fruits and vegetables which make up a portion of the basket of goods. The increase in prices of fruit can be attributed to reduced supply as bad weather and floods in major growing areas have been affecting output (Preliminary Topic 3 – Markets).
  • Whilst inflation has risen, it still remains below the RBA’s target range of 2 – 3%. Importantly, core inflation, which accounts for short term fluctuations in prices is 1.5% below the target (HSC Topic 4 – Economic Policies and Management). This signals scope for the RBA to continue loosening monetary policy to stimulate the economy and encourage inflation to increase. The market, however, has predicted a decrease in the probability of the RBA cutting the case rate. This is because a lower rate of inflation was expected, especially following the disappointing inflation results of the June quarter.
  • After the data was released, the Australian dollar appreciated from US$0.76 to $0.77. This appreciation can be attributed to a number of factors. Firstly, it may be a result of speculative trading as inflation can be a result of growth. Increased economic growth means that there is increased demand in the economy, causing prices to increase (HSC Topic 3 – Economic Issues). Speculation concerning positive growth prospects stimulates speculation of a stronger dollar, causing investors to buy the Australian dollar. Secondly, the appreciation can also be explained by the fact that stronger inflation figures reduce the probability of the RBA cutting the cash rate. This leaves Australia’s cash rate as one of the highest in the developed world. As such, investors would buy Australian dollars to receive higher returns from Australia’s higher interest rates.
  • Although inflation seems to be stronger, some underlying factors such as labour remains subdued. This suggests that the improvement in inflation is not sustainable in the long term until underlying factors such as labour productivity which drives wage growth is fixed.

Why Canada’s failed trade deal with the EU is bad news for Australia

Link to article

Canada and the EU have spent 7 years negotiating a trade agreement. However, negotiations have recently failed. The failed Canadian negotiations now call into question whether free trade is a political problem for Europe now. This does not bode well for Australia, as a very similar country to Canada in negotiating a trade agreement with the EU. Already, Rome has signalled reluctance to enter into negotiations with Australia unless Australia reverses a decision to impose anti-dumping duties on Italian tinned tomatoes.

How does this relate to the HSC syllabus?

  • Trade agreements are difficult to negotiate as parties try to secure a contract on terms most favourable to them. This can be seen through the seven years of negotiation which have occurred between Canada and the EU. Moreover, political factors play a significant role in establishing these agreements (HSC Topic 1 – The Global Economy). The Canada-EU agreement was blocked by votes from Wallonia in Belgium as it was argued that a trade deal with Canada would weaken social and environmental standards in the EU and in particular, the region’s dairy industry.
  • The difficulties of establishing a trade agreement with the EU highlight the regionalisation trend, rather than globalisation. Outsiders to the EU face significant difficulties trading with members due to high trade barriers. Justin Trudeau, Prime Minister of Canada, has commented that the EU’s credibility is being jeopardised as continual failure to ratify agreements signals inability to partake in free trade which ‘is not productive for its citizens or the world’.
  • Australia has imposed anti-dumping duties on Italian tinned tomatoes which is a form of protection (HSC Topic 1 – The Global Economy). This means that prices for Italian tinned tomatoes in the domestic economy are more expensive for consumers, reducing its competitiveness in comparison to domestic goods. This reduces the market shares for the Italian exports which has caused discontent for the Italians. Significantly, disagreement with Australia on this policy may jeopardise its chance in negotiating a larger trade agreement.

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

Comment