Drop in inflation may spark RBA interest rate cuts

Record low rates of inflation may lead to the RBA decreasing its official cash rate at its upcoming board meeting.



An unexpectedly dramatic fall in inflation rates has raised the possibility that the RBA may cut interest rates at its board meeting next week.

ABS figures show that consumer prices have fallen for the first time since the GFC year of 2008, with a deflation of 0.2% in the March quarter.

Combined with the Australian dollar falling to 76.4 US cents, the deflation has led to analysts speculating that the RBA may cut rates next week.

The RBA's measure of inflation ignores such factors as fresh food and fuel prices. By its measure, inflation came in at just 0.15% for the quarter, with the annual rate at a record low of 1.55%. The RBA’s target inflation rate is 2-3%, with this being only the second occasion in 15 years the rate has dropped below these targets.

JP Morgan analyst Sally Auld told the ABC that the official cash rate may fall to 1.75% next week, a basis-point cut of 25.

"There is enough 'signal' – rather than noise – in the last couple of inflation prints to convince the RBA that the disinflationary trend is genuine, and moreover, has not stabilised," Auld said.

Citi economist Josh Williamson described the inflation rate as a “shocker”, adding that it will take another three quarters or more for the inflation rate to approach the lower end of the RBA’s target band.

“This may be longer than the Governor [Glenn Stevens] expected when he made the comment late last year that he was prepared to let underlying inflation move below the bottom of the target band for a period of time without becoming concerned,” said Williamson.

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