Likelihood of an RBA rate cut heightens

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The Reserve Bank of Australia (RBA) will most likely cut official interest rates in the coming months after the release of another weak Australian inflation report, experts predict.

The consumer price inflation (CPI) was unchanged in the three months to March. As a result, the annual increase slowed drastically to 1.33%—down from 1.78% in the year to December last year, according to data from the Australian Bureau of Statistics (ABS).

Markets, on the other hand, had been predicting a quarterly increase of 0.2% and year-ended rate of 1.5%, said Business Insider Australia in a report.

“The [unchanged reading] was a result of price rises in a number of goods and services being fully offset by a number of price falls. This was consistent across most of the capital cities,” the ABS said in a statement.

Underlying inflation, one of the bases of the outlook for monetary policy settings from the RBA, rose by 0.19% during the quarter after seasonal adjustments. The final figure is well below expectations for a larger increase of 0.4%.

Data revealed that the result is the weakest quarterly increase so far, breaking the record set in the March quarter of 2016. Conditions at that time pushed RBA to cut rates twice within the next three months.

The annual rate, similarly, fell to 1.42%—well below the bottom of the RBA’s 2-3% medium-term target.

Underlying inflation has been below the RBA’s target level for over three years, and this increases the chance of a slash in cash rate in the months ahead.

“Today’s data will put increasing pressure on the RBA to cut interest rates,” said Ben Udy, economist at Capital Economics told Business Insider Australia. “Our expectation has been that the bank would wait for further weakness in economic activity and the labour market before cutting rates in August, but the outlook now is eerily similar to early-2016 when the bank cut rates on the back of weak inflation data despite steady improvements in the labour market. The risks are becoming increasingly skewed towards an earlier rate cut, perhaps as soon as May.”

Financial markets now anticipate a 25 basis point rate cut from the RBA on May 7 as a two-in-three chance, with those odds hitting 100% by June.

Another 25 basis point reduction, which will cause cash rate to decrease to 1%, is also fully priced to occur by February 2020.

“The RBA should cut rates when they meet in May, rather than waiting a few months for employment growth to converge with the myriad of weak economic measures,” said Callam Pickering, APAC economist at jobs specialists Indeed, told Business Insider Australia.

 

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