The cash rate could be cut to the lowest level ever recorded on the day of the federal budget after a surprise slump in consumer prices.
The prices of Australian goods and services slumped 0.2 per cent in the March quarter, figures from the Australian Bureau of Statistics show, while for the past year the recorded rise was just 1.3 per cent.
It’s the first quarterly decline in headline inflation in eight years.
More surprisingly, underlying inflation, which strips out volatile price movements, rose by just 1.55 per cent over the year – the weakest growth since records began in 1983.
Both figures sit far below the RBA’s inflation target band of two to three per cent.
The RBA has held the cash rate at a record low of 2.0 per cent since April 2016, but there’s increasing expectations it will deliver a cut a few hours before the federal government hands down the budget on Tuesday.
National Australia Bank changed its rate forecast because of the inflation numbers, and is now tipping the central bank to ease next week.
“Faced with this new lower inflation forecast, it now seems likely that the bank’s board will vote in May to take the opportunity to provide some slight further assistance to the Australian economy and so potentially help lower the unemployment rate more quickly than previously forecast,” NAB economists said.
CommSec economist Savanth Sebastian said the country “essentially went through a period of deflation” in the March quarter.
If the RBA doesn’t cut next Tuesday, the market could take it as a sign that only a drastic domestic downturn would trigger a rate cut, which could in turn push the Australian dollar even higher, he said.
“There is a strong chance the Reserve Bank will cut the cash rate to a historical low of 1.75 per cent in May,” Mr Sebastian said.
AMP chief economist Shane Oliver was another to reconsider the chances of a rate cut, citing the risk that inflation could remain below target for some time.
“While we had virtually given up on a cut at its May meeting next week after recent solid jobs data, there is now a reasonable chance that it may move next Tuesday,” he said.
HSBC chief economist Paul Bloxham said there’s a chance the RBA may need to cut even more than 25 basis points, and that could prove awkward amidst a federal election campaign.
“The RBA typically looks to stay out of the political process, so cutting rates around these events is less than ideal,” Mr Bloxham said.
“Weighing all of this up, there is no denying that inflation is too low, which means that the cash rate almost certainly needs to be cut. The usual rule of thumb is the sooner the better.”