An official rate cut next week seems all but a certainty after official inflation data showed prices barely budged in the March quarter.
Consumer prices inched up a less than expected 0.1 per cent in the first quarter, following a flat reading in the previous three months.
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Shock inflation figure signals multiple rate cuts
Financial markets think a rate cut is certain next Tuesday, and are already factoring in multiple interest rate cuts following a dramatic fall in inflation.
For the year to March 2012, prices increased by 1.6 per cent, following a 3.1 per cent increase over 2011, the Australian Bureau of Statistics said today. The market had expected a 0.6 per cent rise in the quarter and a 2.2 per cent rise in the year.
The core inflation measure, which is watched closely by the Reserve Bank in setting policy, was 2.15 per cent in the year to March, down from 2.6 per cent. For the March quarter it was 0.35 per cent, down from 0.5 per cent.
Betting on a June cut
The dollar fell from $US1.031 to $US1.026 immediately after the data was released, as markets bet on more than one official rate cut.
Investors are now pricing in a 100 per cent chance of a 25 basis point cut in May, and a one-in-four chance of a 50 basis point cut. Before the inflation update, the market was tipping only a 93 per cent chance of a rate reduction next month.
And with inflation seemingly contained for some time to come, investors were willing to lend the government money for 10 years at just 3.67 per cent. That is the lowest 10-year bond yield since the early 1950s.
‘‘We think the May rate cut is pretty much done and dusted now,’’ said RBC Capital Market economist Michael Turner. ‘‘Next month is almost a given and the question is whether the RBA follows up with another cut in June.’’
The low inflation reading meant the RBA could even afford to cut rates by more than 25 basis points, Rochford Capital director Thomas Averill said, adding that such a move would be unlikely.
‘‘Certainly this has given the RBA the scope to cut by 25 basis points at the next meeting,’’ he said. ‘‘I think the RBA has been slow to react to the lower pace of domestic economic growth and a clear downward trend in inflation.’’
Tweeting for a big cut
We think the May rate cut is pretty much done and dusted now.
Much lower than exp Aust inflation for headline and core. #RBA will cut next week. Should do 50bps to ensure decent fall in mortgage rates— Shane Oliver (@ShaneOliverAMP) April 24, 2012
Inflation collapsing ... Inline with poor GDP and jobs data.RBA to go 50 and then some at this rate— Stephen Koukoulas (@TheKouk) April 24, 2012
Treasurer Wayne Swan welcomed today's inflation figures. "In particular, underlying inflation remains contained," he told reporters in Canberra.
"Contained inflation is a reminder of our strong economic fundamentals that put the Australian economy is a league of its own," he said, adding that it created room for rate cuts.
But Mr Swan acknowledged that many households were still doing it "tough".
"We can see this in the figures," he said. "There are a number of seasonal factors effecting in particular, health and education."
Shadow Treasurer Joe Hockey said that the CPI figures indicated that overall inflationary pressures are benign but that much of it is due to a decline in fruit prices as growing conditions recover following last year's natural disasters.
In a statement, Mr Hockey said the figures confirmed the cost of key household items continues to "outstrip average incomes" and that the carbon tax "will further intensify these cost of living pressures".
"If Labor cared about cost of living pressures they would immediately abandon their plans to introduce this destructive new tax which will increase the price of everything," he said.
Mr Hockey's comments came as Opposition Leader Tony Abbott tripped up over the Reserve Bank board meeting, which is scheduled for next Tuesday.
This morning, Mr Abbott incorrectly referred to the RBA board meeting occurring today.
"Should the Reserve Bank lower interest rates today that will be welcomed," he said.
Mr Swan said that if Mr Abbott was more focussed on the economy and less on his "mud bucket", then he would know when the RBA board was next meeting.
Fruit prices plunge
Key to containing inflation has been the strength of the Australian dollar in the first quarter which reached peaks not seen since 1985 when measured in trade weighted terms.
That in turn pushed down prices for a whole range of imported goods, from cars to computers, clothes and industrial machinery. Figures out last week showed prices for imported consumer goods fell 2.7 per cent in the first quarter, taking that index to lows last seen two decades ago.
Inflation was also pulled down by a 30 per cent drop in fruit prices in the quarter and a 5 per cent drop in international holiday costs, most likely aided by the strong Australian dollar.
Coles today reported a record 25 per cent price fall in fresh fruit and vegetables in the first three months of the year.
Electronics prices fell 6.3 per cent in the quarter while domestic travel fell 2 per cent, the ABS said.
On the other end of the scale, drug prices rose 14.1 per cent in the quarter, while tuition costs for secondary education increased 7.7 per cent.
RBA focusing on prices
The Reserve Bank said earlier this month that a weaker first quarter inflation reading would allow it cut the interest rate on May 1 if needed.
In its April 3 meeting, the RBA said: ‘‘The board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.’’
The gap between the mining and non-mining economy has grown over the past year, as the commodities boom rewards areas associated with mining, while driving up costs nationwide.
Inflation not gone
HSBC economist Paul Bloxham said that inflation was notoriously difficult to forecast, which accounted in part for the surprise in the number today.
"We expect the Reserve Bank to cut the interest rate by 25 basis points next week," he said, but dismissed calls for a 50 basis point cut.
He also downplayed the likelihood of the RBA cutting a total of 50 basis points from the cash rate in coming months.
"The parts of inflation that are very persistent that tend to be steady were actually steady at reasonably high rates [in the March quarter]," he said, adding that included items like utilities and tuition.
The fall in inflation was triggered by dropping food prices and the appreciation of the exchange rate, he said.
"It's highly likely those things won't continue and that at some point down the track inflation will drift up again."
With Judith Ireland