ank of America (BofA) analysts projected that the disinflationary trend in Australia is likely to continue, based on the upcoming Consumer Price Index (CPI) data release for the fourth quarter of 2024 by the Australian Bureau of Statistics (ABS).
The forecast suggests a moderate rise in headline CPI by 0.2% quarter-over-quarter and 2.3% year-over-year, down from 2.8% in the previous quarter, largely attributed to electricity rebates. Moreover, underlying inflation is also expected to show a decline, with trimmed mean inflation anticipated at 0.5% quarter-over-quarter and 3.2% year-over-year.
The analysis by BofA indicates that the spread and breadth of inflation have improved, with fewer CPI components increasing over 3% compared to the past year. Services are seen as a continuing factor in supporting inflation levels, whereas prices for goods are on a downward trend. This divergence is expected to continue. Notably, dairy products, fruits, and vegetables are among the primary contributors to the disinflation of goods, a trend that is consistent with other economies.
In terms of market strategy, BofA suggests that the optimal time for engaging with Reserve Bank of Australia (RBA) Overnight Indexed Swaps (OIS) could be after the release of the CPI data. The bank's analysts believe that even if trimmed-mean inflation is slightly higher than expected at 0.6% quarter-over-quarter, the market is likely to price in at least 12 basis points of cuts, equating to a 50-50 probability. If the trimmed-mean CPI aligns with BofA's forecast at 0.5% quarter-over-quarter, market pricing could indicate 20-22 basis points of cuts.
The analysts note that, assuming the CPI data does not reveal any tail-risk scenarios, there could be an attractive risk/reward opportunity for positioning in February or May 2025 RBA OIS, anticipating fewer rate cuts. This perspective is particularly relevant as there are no further job reports scheduled before the next RBA meeting.
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