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Inflation rate slows, boosts the chance of a rate cut

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The central bank has room to deliver at least two interest rate cuts in the next few months, following the release of weak inflation data, economists say.

The consumer price index (CPI), rose 0.1 per cent in Australia in the March quarter, for an annual inflation rate of 1.6 per cent, the Australian Bureau of Statistics said on Tuesday.

Underlying inflation, the Reserve Bank of Australia’s preferred measure, was at 0.35 per cent for the quarter and 2.15 per cent for the 12 months to March, its lowest level since 1999.

Commonwealth Bank chief economist Michael Blythe said the weak inflation figures would allow the RBA to cut the cash rate in May.

“A rate cut looks like a very high probability given the RBA itself put on these numbers,” he said.

The figures were well below economist’s expectations of an 0.7 per cent rise in CPI and an 0.6 per cent rise in underlying inflation over the quarter.

The RBA kept the cash rate on hold at 4.25 per cent in February, March and April but indicated a May rate cut was likely if inflation remained within its target band of two to three per cent.

Macquarie Securities economist Aimee Kaye said she was expecting a cut next week, followed by another in June.

“You could have argued the RBA needed to cut the cash rate quite aside from waiting for today’s data,” she said.

“So, over the coming three months it will be a lot more about the profile of the other sectors of the economy, particularly the housing sector and how well that responds or doesn’t respond to lowered interest rates.”

Ms Kaye said there were a number of factors keeping consumer prices low.

“I think the drivers were the fruit and vegetable prices as the delayed impact from the supply shortage last year from the cyclones wore off,” she said.

“We also saw the continuation of retail discounting, given that consumers are reluctant to spend, you’ve obviously seen a lot of discounting in the retail sector and that’s been reflected in the CPI reading.”

UBS interest rate strategist Matthew Johnson said the inflation numbers indicated the need for the RBA to take an easing position.

“If you’ve got inflation running at the current pace, it tells you monetary policy is way too tight,” he said.

“They need to ease, just to get away from restrictive policy. I think that means two cuts.”