Australia was betting on a low CPI today. You would think it was crazy to hope for poor economic data but in the case of Australia, consumers and businesses are hoping and praying for a rate cut by the RBA this month. Markets should know that they can never pre-guess Glenn Stevens.
The trimmed mean CPI, a measure of underlying inflation, rose by 0.3 per cent in the quarter and by 2.2 per cent in the year to March. That puts the pace of underlying price increases in the bottom half of the Reserve Bank’s target for inflation of between two per cent and 3 per cent, and clears the way for a cut in the Reserve’s cash rate when it next meets, on May 1.
The Reserve signaled that it was ready to ease rates if inflation remained under control when it left the cash rate unchanged at 4.25 per cent at its last meeting on April 3. It said then that pace of growth was ”somewhat lower than earlier estimated,” but that it believed that it would be ”prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy”.
That data is now in, in the form of today’s quarterly CPI. It’s low enough to create room for a cut of a quarter of a percentage point on May 1, and probably lays for the groundwork for another cut after that. Cuts are overdue: the Reserve has been holding rates high to contain demand and price inflation in the resources boom, but the boom has slowed in the last six months as commodity prices have eased, and impact of the Reserve’s high rates on areas of the economy that are not plugged directly into the boom has been severe.The central bank now has the room it has said it needed to hand sectors including tourism and manufacturing relief – relief that will come not from a reduction on borrowing costs that will flow from a cut in the cash rate, but from reduced pressure on the Australian dollar, which is driven to an extent by the strength of interest rates on offer to international investors, and by the stimulus to demand in the economy generally that a rate cut will deliver.
An official rate cut next week seems all but a certainty after official inflation data showed prices barely budged in the March quarter. Consumer prices inched up a less than expected 0.1 per cent in the first quarter, following a flat reading in the previous three months. For the year to March 2012, prices increased by 1.6 per cent, following a 3.1 per cent increase over 2011, the Australian Bureau of Statistics said today. The market had expected a 0.6 per cent rise in the quarter and a 2.2 per cent rise in the year.
The core inflation measure, which is watched closely by the Reserve Bank in setting policy, was 2.15 per cent in the year to March, down from 2.6 per cent. For the March quarter it was 0.35 per cent, down from 0.5 per cent. The Aussie dollar fell from $US1.031 to $US1.026 immediately after the data was released, as markets bet on more than one official rate cut. Investors are now pricing in a 100 per cent chance of a 25 basis point cut in May, and a one-in-four chance of a 50 basis point cut. Before the inflation update, the market was tipping only a 93 per cent chance of a rate reduction next month.
And with inflation seemingly contained for some time to come, investors were willing to lend the government money for 10 years at just 3.67 per cent. That is the lowest 10-year bond yield since the early 1950s.