Low inflation risks budget day rate cut

Treasurer Scott Morrison could yet be upstaged on budget day after the latest inflation figures showed prices fell for the first time in eight years.

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This could result in the Reserve Bank cutting the official cash rate to a record low of 1.75 per cent at next Tuesday’s monthly board meeting, just hours before Mr Morrison hands down his first budget.

It would be the first move since last May when the rate was cut to an all-time low of 2 per cent.

The consumer price index fell 0.2 per cent in the March quarter, leaving the annual rate at just 1.3 per cent, well below the central bank’s 2-3 per cent target band.

Underlying measures of inflation – which smooth out volatile price moves and are closely monitored by the Reserve Bank – were also unexpectedly benign.

Financial markets put the chance of a cut now at 50/50 having previously seen little chance of a move in the near term.

“Clearly the chances of a rate cut next week have moved a lot higher,” Commonwealth Bank of Australia senior economist Michael Workman said.

He said the extraordinarily low outcome reflects not only lower petrol prices but widespread price discounting by retailers.

Whether a rate reduction would lift the mood of Australians or spook them is unclear given the already low level of rates.

New figures showed the fragile state of consumer confidence, falling sharply ahead of the budget.

The weekly ANZ-Roy Morgan confidence gauge tumbled 3.5 per cent to end below its long-run average.

It reversed the gain of the previous week that followed stronger than expected jobs figures.

Mr Morrison is confident the budget will provide greater certainty.

“Confidence is important in the economy because it is supporting household consumption in our economy which is supporting growth,” he told reporters in Queanbeyan, NSW.

ANZ head of Australian economics Felicity Emmett said it was a disappointing result, although she is not expecting any significant policy surprises that will hit household pockets.

“Any impact on confidence may be temporary,” Ms Emmett said on Wednesday.

The latest Essential Research online poll found almost half of respondents expect that “well-off” people will benefit most from the budget.

However, there would be strong support for increased health and education funding, personal tax cuts, reduced superannuation tax concessions for high earners and an increased tax on cigarettes.

But only 22 per cent wanted to see a cut in the company tax rate.

Australian Industry Group boss Innes Willox has a simple message for Mr Morrison – be bold.

Business wants the budget back in balance in five years, while providing a trajectory to a cut in the company rate, reductions in personal income tax, and some serious work around infrastructure and skills.

“It’s not rocket science what business is after,” Mr Willox told Sky News.

“We don’t want this to be a timid budget, we want it to give us very clear directions for the years ahead.”