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Forward lookingThe Q3 inflation data help to re-affirm the RBA’smore relaxed stance on inflation that has emergedover the past month or two. However, to concludethat it will therefore deliver a cut on 1 November ispremature. Certainly, on a quarter-on-quarterannualised basis, underlying inflation was weak. Butthat followed two unexpectedly strong quarters, solooks like a correction. The big picture is that the datahave helped remove concerns about upside risks toinflation, but they are unlikely to have given rise toconcerns that inflation will be too low in the future.The factors underlying this judgment are that:• Surveys of costs are close to their average;• The unemployment rate is close to trend;• Compensation growth is robust; and• The AUD remains strong by historical standards.Chart 3: Around Trend – ISource: Reuters EcoWin Pro, BNP ParibasChart 4: Around Trend – IIThis should show through in the RBA’s inflationforecast, released in the Statement on MonetaryPolicy. We expect it to be consistent with the 2-3%target over the forecast horizon, compared with theprevious forecast, in which underlying inflation roseabove 3.0%.The key point is that better news on inflation hasremoved an obstacle to a rate cut, but it has notmade a cut in November a done deal. If anything, weview the risk that the RBA delays cutting rates tobeyond our December forecast as greater than therisk it cuts in November.Source: Reuters EcoWin Pro, BNP ParibasChart 5: Bias to Ease…Talking deputy-headDeputy governor Ric Battellino’s speech on25 October – the day before the CPI data werereleased – highlights that while the RBA is mindfulthat some policy easing might be necessary at somepoint, it does not sound like a central bank ready topull the trigger imminently.Mr Battellino reiterated the sentiment from theOctober statement, namely that, “the downwardrevisions to recent estimates of underlying inflationand the softer global economic outlook have madethe outlook for inflation less concerning, providingscope for monetary policy to be supportive ofeconomic activity, if needed”.However, if anything, Mr Battellino, and possibly byimplication, the RBA, appears more relaxed aboutglobal conditions than one month ago.He noted: “It remains to be seen how the Australianeconomy will respond to the recent financial volatilityand the consequent fall in confidence and the loss ofwealth. To date, however, as in the United States,the flow of monthly data in Australia has been a littleSource: Reuters EcoWin Pro, BNP Paribasbetter than might have been expected given thevolatile financial environment”.Certainly, since the last meeting NAB businessconfidence has improved, consumer confidence hasrisen, employment growth has picked up and retailsales growth has recovered somewhat. This is not tosay that a rate cut will not prove necessary.Mr Battellino himself acknowledged, “job vacanciesand advertisements are lower than their peak aroundDominic Bryant 27 October 2011Market Mover26www.GlobalMarkets.bnpparibas.com