Subdued inflation lifts chance of rate cuts

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Contributing to a lower-than-expected inflation rate is the fall in the prices of fruit, furniture and travel; these keep the door open for further rate cuts if the economy weakens.

The latest Bureau of Statistics data show: The headline inflation increased 0.4 per cent quarter-to-quarter, and 2.5 per cent year-on-year.

“It was quite surprising because [the first quarter of the year] is generally a quarter of strong seasonal price increases,” Citi senior economist Joshua Williamson said.

“There were fairly wide weaker results than expected across the board for most of the important indicators.”

The trimmed mean increased by 0.3 per cent for the quarter along with 2.2 per cent in the year to March, whereas the weighted median elevated 0.5 per cent for the three months and 2.6 per cent over the past year.

The trimmed mean and the weighted median frame the fundamental inflation rate, which has abide comfortably within the central bank’s target band of 2 to 3 per cent covering the past few years, giving the central bank the chance to trim down interest rates from a previously low 3 per cent if economic activity deteriorates this year as mining investment hits the highest point.

Mr Williamson said the lower-than-expected rate meant there was an increased chance of a cut to the cash rate in May, or in June after company capital expenditure expectations data is released.

In May the market is now pricing in a 42 per cent chance of a rate cut by the RBA.

ANZ senior economist Riki Polygenis said she did not believe the subdued inflation figures would alter the Reserve Bank’s stance at this time. “The RBA was already very comfortable on the inflation front and has been focusing more on the weakness in non-mining activity and labour market data,” Ms Polygenis said, adding that ANZ still expected further rate cuts to occur this year.

In the next two weeks before the Reserve Bank meeting on May 7, the central bank would be looking at other domestic indicators as well as movements in the world economy for guidance said BT Financial Group chief economist Chris Caton.

“The Reserve Bank simply doesn’t have to worry about inflation. It does have to concern itself about the labour market, [but] we won’t get any more news about that until after the next meeting,” Mr Caton said.

“The concern about the rest of the world is possibly slowing growth in China and in the United States, and nothing happening in Europe. If anything happens to increase those concerns in the next couple of weeks that would certainly increase the chance of a rate cut in Australia.

“The Australian dollar lost about a quarter of a cent to $US1.0245 following the data release.

The uppermost price rises were recorded for pharmaceuticals with 7.6 per cent, tertiary education with 6.5 per cent and tobacco with 3.7 per cent.

On the contrary, international holiday travel and accommodation dropped by 5.2 per cent for the quarter, whereas furniture prices descend by 6.8 per cent and fruit plunged by 7 per cent and clothing and footwear prices were lesser by 3.9 per cent.

Economists had anticipated the headline inflation rate to go up by 2.8 per cent and the principal rate to pick up by 2.4 per cent.