It will all be about inflation. The March quarter consumer price index on Wednesday will be a dominant guiding force for the markets and the Reserve Bank of Australia.
For the past year and a half, the underlying inflation rate has been below the bottom of the RBA’s 2 to 3 per cent target for inflation, which has been a factor driving the official cash rate to a record low 1.5 per cent. Another low result would validate the current market pricing which is skewed towards a possible interest rate cut within the next half year.
That said, there is some tentative evidence that price pressures have edged up on the back of a rise in commodity prices late in 2016 and very early 2017. The bottom line is that annual underlying inflation is likely to edge up to around 1.75 per cent but because this is still below target and the economy is still a bit soggy, the market will still price in the risk of an interest rate cut over the next few months.
