Over the weekend the Melbourne Institute Monthly Inflation Gauge was reported (official CPI data is only released quarterly by the Bureau of Statistics) with a year-over-year growth level of 2.23%. The continuing decline in inflationary pressures leaves more room for Governor Stevens and his team at the Reserve Bank to cut rates from the current 4.25%.
For the Australians declining inflation is a double-edged sword since the collapse of the commodity bubble of 2008 has dramatically dampened short term prospects for the country’s GDP. Q4 import/export price statistics slated for release on Wednesday will provide an insight into how large the impact of declining metal and fuel prices may be.
We have long admired the resolve that Mr. Stevens and his predecessor Ian Macfarlane used in rate policy during the white hot growth of 2006-2008; their policies left the land down under with plenty of room to cut rates. Unlike Brazil however, Australia’s declining commodity export revenues are not offset by massive internal consumer demand, leaving them vulnerable to long term deflationary pressure.
We will continue to watch Australian equities, which we have owned on several occasions over the past two quarters, if only for a short term “Trade.”