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.PT2M42S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-1xita 620 349 April 24, 2012
AUSTRALIANS can expect a series of rate cuts, beginning with a drop of at least 0.25 points at the Reserve Bank board meeting next Tuesday, after much weaker than expected inflation figures.
The consumer price index climbed just 0.1 per cent in the first three months of the year, and by just 1.6 per cent over the year to March - the weakest annual price growth since the 2009 global financial crisis. This is a sign that both inflation and economic growth are weaker than the Reserve had expected.
More rate cuts are likely to follow in response to a tough budget which will tend to further dampen economic activity in the quest for a surplus.
Debate at Tuesday's meeting will be about whether to cut the cash rate by 0.25 or 0.50 points.
Lower interest rates and easing cost of living pressures could take some sting out of the unpopular carbon tax, to be introduced in July.
Pushing down prices was a 60 per cent drop in the price of bananas in the quarter and a 30 per cent fall in the price of fruit. Over the year to March fruit prices fell 24 per cent and vegetable prices 17 per cent.
Even ignoring the price of volatile items such as fruit and vegetables, inflation is weak. The Reserve's measure of so-called underlying inflation came in at an extraordinarily low 0.35 per cent for the quarter and 2.15 per cent for the year. The annual figure is the lowest in 13 years.
"The Reserve Bank got it wrong," said Stephen Koukoulas, an economic consultant who was until recently an adviser to the Prime Minister.
"They should have cut in February, they should have cut in April. Even as late as last year they were expecting inflation above 3 per cent. It is now clear they underestimated the impact of the strong dollar and failed to appreciate how weak retailing and construction really were."
The Treasurer, Wayne Swan, said while the Reserve Bank was independent, "you would only have to look at their minutes published a week or two ago to see that they themselves have said that they'll be looking closely at this inflation number, and they will do that and take their decision independently".
The bank said if inflation eased further "a case could be made for a further easing of monetary policy".
Financial markets were last night pricing in four more cuts of 0.25 per cent by Melbourne Cup day, taking the Reserve Bank cash rate down from 4.25 per cent to 3.25 per cent. If fully passed on they would bring down standard variable mortgage rates from around 7.4 per cent to 6.4 per cent. This would cut $190 a month from the cost of servicing a $300,000 mortgage, taking monthly payments below $2000.
Attempts to make political capital of the Reserve's deliberations turned to farce yesterday when the Opposition Leader, Tony Abbott, wondered out loud whether the bank would "lower interest rates today", apparently unaware the bank board wasn't meeting until next Tuesday. The Financial Services Minister, Bill Shorten, pounced, saying anyone who wanted to be the alternative prime minister ought to know when the bank board met.
"The Reserve Bank board has been meeting on the second Tuesday of the month since 1960," he told the ABC's PM program. Mr Shorten was also wrong. The board meets on the first Tuesday of the month.
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