Weak inflation report: the case for an interest rate cut

0
362

They concluded that, in a scenario “where inflation did not move any higher and unemployment trended up”, an interest rate cut would be “appropriate”.

Wednesday’s unquestionably weak reading on inflation certainly satisfies the first part of that equation; although the second part – an uptick in joblessness – is missing.

But that’s not to say there are other scenarios in which an interest rate cut could be judged appropriate by the board.

Inflation in Australia is unquestionably low. And it is the Reserve Bank’s job to keep consumer prices rising within a target band of 2 to 3 per cent, on average, over the medium term. If inflation persistently has a “1” in front – as it does – that may start to feed into expectations.

The key question for policy makers to consider is to what degree inflation can be expected to pick up in coming quarters?

One-off factors are partly to blame for Wednesday’s weaker inflation picture. Petrol prices have since rebounded.

Loading

But there are also signs the weakness in prices could be sustained. Most importantly, price measures to do with housing – which make up about 15 per cent of the weight of the basket of goods and services measured – were particularly weak.

The sale price of established dwellings is excluded from the CPI, but the measure does track the cost of newly-built, mostly detached housing in the outer suburbs. Amid a property downturn, selling prices and construction costs have cooled. That’s not surprising in itself. But prices have cooled quicker than expected. And there’s little reason to expect a rebound.

Rents, too, remain subdued, amid the new supply of apartments, in particular.

Meanwhile, governments are on campaigns to ease the cost of living squeeze for families. The cost of participating in sports and arts programs is weaker, particularly in NSW, where discount vouchers are available.

And retail competition continues to keep a lid on grocery costs.

Another question for policy makers is whether interest rate cuts would help to stimulate activity and, hence, prices. Given the housing market, borrowers are unlikely to go on a borrowing spree.

But rate cuts would help to put extra cash in borrower’s pockets and lead to a lower dollar, which helps exporters.

The robust state of Australia’s jobs market still argues against an immediate interest rate ease when the Reserve Bank’s board meets for a 29th time under governor Lowe on the first Tuesday of May.

But a weaker inflation report gives them cover to cut. It’s not inconceivable they might use it.

Jessica Irvine is a senior economics writer with The Sydney Morning Herald.

Most Viewed in Business

Loading

Source