Reserve Bank under pressure to cut interest rates days out from election

The Reserve Bank is under pressure to deliver an interest rate cut 11 days out from the federal election after new figures revealed inflation effectively dead across the country in a sign the national economy is weakening.

In what may be the most politically charged Reserve Bank board meeting since 2007, financial markets put the chance of the RBA taking official interest rates to a new record low of 1.25 per cent on May 7 at better than 60 per cent.

Reserve Bank governor Philip Lowe.

Reserve Bank governor Philip Lowe.

It followed the Australian Bureau of Statistics reporting a zero increase in consumer prices through the first three months of the year.

The lower than expected result, which saw the Australian dollar fall half a cent and pushed the ASX200 to its highest level in 12 years on expectations of an impending interest rate cut, took annual inflation down to 1.3 per cent.

Of more importance to the Reserve Bank, underlying inflation measures - which exclude one-off factors - fell to their lowest levels on record and well short of the RBA's 2-3 per cent target band.

The ABS reported vegetable prices lifted by 7.7 per cent in the quarter as weather conditions drove up the prices of tomatoes, cucumbers, asparagus and broccoli but this was offset by big falls in petrol prices and domestic travel.

In a sign of the softness in the property market, rents nationally rose by 0.4 per cent over the past year, the lowest annual result since mid-1993.

Overall inflation actually fell through the quarter in Sydney, Perth and Darwin with annual inflation above two per cent in just one city, Hobart, suggesting the downward pressure on prices is a national issue.

Separate figures from the Jobs and Small Business Department showed online employment vacancies falling in March by 1.5 per cent, the third successive monthly drop in this leading indicator of the health of the jobs market.

Opposition Leader Bill Shorten said the result showed the economy was in trouble.

"If there's no inflation in this quarter, that tells you this is an economy running on empty," he said.

"It shows you that people have stopped spending money and do you know why they have stopped spending money? Because wages aren't moving."

But Prime Minister Scott Morrison, who noted the figures showed electricity prices went down over the past 12 months, said the Reserve Bank would also look at the strong jobs market when making a determination about the economy.

"They'll also keep looking at what we're seeing in terms of employment growth and in the

most recent employment figures were also very strong, particularly for full-time jobs growth," he said.

"So, you know, the economy is a mixture of these figures, that's the one quarter on inflation and that has been at zero, 1.3 per cent through the year. I think that's what will all be weighed up."

While the Reserve Bank sliced interest rates early during the 2013 election, a cut this year would undermine the Coalition's claims that it is overseeing a "strong economy".

During the 2007 election the RBA, then under the leadership of Glenn Stevens, came under fire from within the Coalition after interest rates were lifted a fortnight out from polling day. The move cruelled the government's claims that it would keep interest rates low.

ANZ senior economists David Plank and Hayden Dimes said the Reserve Bank effectively had no choice but to cut rates at its May 7 meeting if it was to get inflation back to its target band while boosting overall economic growth.

"We have doubts that modest rate cuts will do much to push inflation sustainably higher, but it's hard to see that the RBA has much choice but to use the tool at its disposal [which is] a lower cash rate," they said.

"We don't see the timing of the election being a constraint on the RBA acting."

AMP Capital chief economist Shane Oliver said with GDP likely to remain low through the rest of the year, weak demand would also keep downward pressure on prices and wages.

"The weakness in Australian inflation confirms the spare capacity remains significant in the economy," he said.

  • SMH/The Age
This story Reserve Bank under pressure to cut interest rates days out from election first appeared on The Sydney Morning Herald.