Today’s low inflation quarterly print (-0.2%) – the first negative quarterly inflation figure in 7 years – has thrown a curve ball into market calculations for interest rates. The trimmed mean or underlying inflation rate is said to be the lowest ever at 1.7% year on year and well below the RBA’s target inflation band of 2.0% to 3.0%.
The chief economist of JP Morgan, Sally Auld, said on Sky Business news that she was changing her call on rates and that the RBA had “no choice” but to cut rates when it meets next Tuesday 3 May. She said that in all her years she had “never seen an inflation print that’s surprised so much to the downside.” She is now calling for a cut in May and in August this year.
Warren Hogan, the former chief economist of ANZ, tweeted that if the RBA want “their full bang for their rate cut” then they should go before the election as banks would be “brave” not to pass the rate cut on to consumers.
Goldman Sachs and Macquarie are also calling for a rate cut at May’s board meeting.
The snapshot of the economy is that the December quarter GDP figure was very strong (with September revised upwards as well), the latest unemployment rate surprised on the downside and the latest inflation numbers are the lowest at least for the last 15 or so years.
The economy looks as though it can grow at a faster clip and reduce unemployment even further without upsetting inflation. With the Australian dollar stubbornly high the question for the RBA is why wouldn’t they want to give the economy a kick along and cut rates?