CPI data raises hope of rate cut

Consumer prices edged up in the first quarter, falling short of expectations, according to the Australian Bureau of Statistics (ABS).

The ABS data showed a lift in the headline inflation rate of just 0.1 per cent, missing analyst expectations of a 0.6 per cent increase and fuelling speculation of a possible interest rate cut in May.

After the Reserve Bank of Australia’s April board meeting, governor Glenn Stevens, indicated a cut in the cash rate was likely in May if inflation was contained.

The consumer price index (CPI) is now 1.6 per cent higher through the year to the March quarter, versus a forecast of 2.2 per cent.

Trimmed mean CPI in the first quarter was up 2.2 per cent for the year against a predicted rise of 2.4 per cent.

The weighted median CPI rose 0.4 per cent in the March quarter, for an annual rise of 2.1 per cent.

Commonwealth Bank chief economist Michael Blythe said the weak inflation figure would allow the RBA to cut the cash rate from its current level of 4.25 per cent.

“A rate cut looks like a very high probability given the RBA itself put on these numbers,” he said.

“Certainly on these numbers there is plenty of scope.”

Mr Blythe said the lower than expected figure would also add to expectations the RBA could cut the cash rate more than once over the coming months.

“Markets have already moved to price in another cut,” he said.

Macquarie Securities economist Aimee Kaye said the weak inflation figures does create room for the RBA to lower rates next week.

“So we continue to expect a 25 basis point cut in the cash rate in the decision next week followed up by a further cut, likely in June,” she said.

Ms Kaye said there could still be more cash rate cuts in the second half of 2012.

“We’re still seeing that there is a need and room for the RBA lower rates,” she said.

“You could have argued the RBA needed to cut the cash rate quite aside from waiting for today’s data.

“So, over the coming three months it will be a lot more about the profile of the other sectors of the economy, particularly the housing sector and how well that responds or doesn’t respond to lowered interest rates.”

Ms Kaye said consumer prices are still weak because of a couple of factors.

“I think the drivers were the fruit and vegetable prices as the delayed impact from the supply shortage last year from the cyclones wore off,” she said.

“We also saw the continuation of retail discounting, given that consumers are reluctant to spend, you’ve obviously seen a lot of discounting in the retail sector and that’s been reflected in the CPI reading.”

UBS interest rate strategist Matthew Johnson said the data suggested the RBA would need to deliver at least two rate cuts.

“If you’ve got inflation running at the current pace, it tells you monetary policy is way too tight,” he said.

“They need to ease, just to get away from restrictive policy. I think that means two cuts.”

He said interest rate futures had rallied after the data was released.

The market had fully priced in a 25 basis point cut in May, and a 20 per cent chance of a 50 basis point cut, he said.

“But, I think the market should be pricing in a 50/50 likelihood of a 50 point cut.”

RBC Capital Markets senior economist Su-Lin Ong said the inflation numbers would look promising to the RBA.

“It’s pretty benign all-round, both the headline and core,” she said.

“Most importantly, the core measures are coming in towards the bottom of the RBA’s two to three per cent target range, and inflation looks to be easing quicker than I think most people, including the RBA, have stated.”

With markets pricing in an almost definite rate cut next week, MS Ong said, the RBA could ease by more than previously suggested.

“Markets will probably speculate over the possibility of a 50-basis point cut next week,” she said.

“We’re still sticking with 25, but we’re bringing forward our third quarter cut slightly to June. So, we think there’s a greater chance they go back-to-back 25, rather than doing 50 in one hit.

“I think what we’ll see next week is a cut, followed by the RBA revising down both growth and inflation forecasts.”


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