Interest rates to fall as inflation pulls up weak

Paul Syvret | The Courier-Mail | April 25, 2012

http://www.news.com.au/business/interest-rates-to-fall-as-inflation-pulls-up-weak/story-e6frfm1i-1226337525688

Expect a cut in official interest rates next week of at least 0.25 per cent.

That result from Tuesday’s Reserve Bank meeting would now appear almost guaranteed following inflation figures yesterday far weaker than even the most dovish of economists’ expectations.

According to the Bureau of Statistics, the headline inflation number for the March quarter was just 0.1 per cent, giving us an annualised rate of 1.6 per cent.

On what is known as core inflation – the statistically smoothed number the RBA prefers to look at – the annual number comes in at just over 2.1 per cent, which is right at the bottom end of the Bank’s 2-3 per cent target band.

Hefty falls in food (particularly fruit and vegetables) and recreation prices kept the lid on inflation in the latest quarter, while jumps in the cost of health care and education were the main rises.

When you look deeper into the data, however, the underlying inflation story is likely to be even weaker than these numbers would indicate (and remember the latest figures follow a ‘zero’ print for the December quarter).

The March quarter is normally one of some considerable price pressures given the timing of Pharmaceutical Benefits Scheme adjustments (health care) and the fact that independent schools set their fees for the new year during the period (education).

Strip these out of the equation and you are looking at close to a negative print for the quarter, helped along by a high dollar, which has kept down the cost of important goods and helped temper the worst of rising oil prices.

Housing cost price inflation also remained weak, giving yet more impetus for the RBA to move this coming Tuesday.

In fact the overall inflation figures were so low that investors immediately sold off the Australian dollar by more than half a cent in the expectation now that there will be two rate cuts in coming months.

While some economists are speculating the RBA may cut by as much as 50 basis points next Tuesday, others believe this is unlikely just one week ahead of the Federal Budget and instead predict further easing in June or July depending on just how tough those Budget numbers are.

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