Quarterly inflation hits zero, May RBA rate cut looks more likely

author-avatar By on April 24,2019
Quarterly inflation hits zero, May RBA rate cut looks more likely

Photo by Will O on Unsplash

Australia’s latest set of inflation figures have underwhelmed economists, sparking fierce calls for the nation’s central bank to cut interest rates as soon as next month.

In another sign of Australia’s slowing economy, the Australian Bureau of Statistics’ (ABS) Consumer Price Index (CPI) recorded 0.0% movement in the March 2019 quarter, underperforming market forecasts for 0.2%.

This figure is down from 0.5% in the December quarter, dragging the economy’s annual CPI inflation rate down from 1.8% to 1.3% – well below the Reserve Bank of Australia’s (RBA) target band of 2-3%.

The RBA board has recently flagged it would be likely to cut the cash rate should inflation fail to lift while unemployment rises.

With today’s sliding inflation figures, the first half of that equation appears complete.

But the second half – unemployment – has remained low, with the recent jobs data smashing expectations and surprising the many economists that had tipped employment to weaken.

Yet a number of economists believe the RBA shouldn’t wait for the unemployment rate to rise, calling for the bank to act as soon as the next meeting on 7 May to cut the cash rate.

ANZ’s team of economists are among those, today joining fellow big four banks NAB and Westpac in forecasting that the RBA will cut the cash rate twice in 2019, specifically in May and August.

Westpac tips the 25-basis point cuts to occur in August and November while NAB expects them in July and November.

ANZ analysts said the much lower than expected inflation figures mean something has to materially change for the RBA to credibly forecast Australia’s return to 2% annual inflation.

“That something has to be a stronger growth outlook that puts material downward pressure on underemployment in the labour market,” ANZ analysts said.

“The contribution the RBA can make to a stronger growth outlook is to ease monetary policy which, in its own words, will ‘support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure’.”

ANZ analysts doubt the modest rate cuts will push inflation sustainably higher but say it’s hard to see the RBA has much choice than to lower rates, even before a federal election.

“We don’t see the timing of the election being a constraint on the RBA acting,” they said.

ANZ’s economists represent a single voice among a chorus of calls for a May RBA rate cut that now includes AMP, UBS and JPMorgan as well as many others, as exemplified by the tweets below:

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Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked as a Senior Journalist at financial research firm Canstar before helping to launch Savings.com.au in November 2018. Dominic aspires to help everyday Australians discover simple and effective ways to comfortably manage their finances and save money, without sacrificing their joie de vivre.

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