A negative March quarter Consumer price index print of -0.2% (vs exp +0.2%) has led to the Reserve Bank cutting the cash rate by 25bps to 1.75% at its board meeting today. The rate is a historic low in Australia and demonstrates the RBA is concerned about deflation and its effect on jobs.
GDP growth has been reasonably strong and the recent unemployment rate moved down to 5.7% but inflation is the key to the RBA’s move. The average of the underlying inflation measures came in at 1.55%, well below the RBA’s target band of 2.00% to 3.00% and it analysts calculated it would take three consecutive quarters of 0.7% inflation to get the inflation rate back to the bottom of the band.
The RBA meeting statement said recent inflation data was “unexpectedly low” but with subdued growth in labour costs and low cost pressures elsewhere in the world, a lower inflation outlook than previously forecast is likely.
The RBA has a mandate to maximise employment growth and maintain price stability so the rate move, it is hoped, will increase economic activity and jobs without increasing inflation. The impact of cutting rates when they are already at historic lows will be debated though with some describing such as move as ‘pushing on a string’.
Worries about housing were addressed by the RBA that said “supervisory measures are strengthening lending standards……potential risks of lower rates in this area are less than they were a year ago.”
The Australian dollar lost over 1.5% immediately after the announcement to 75.70 US cents and markets also priced the chance of a further rate cut to 1.50% by August as a 50% chance. Equity markets soared higher on the news. Five hours after the rate cut announcement, the Federal Government is due to hand down its 2016/2017 budget that is also seen as the precursor to a federal election announcement later in the week.
Who said interest rate markets were dull?