Low Inflation, on Its Own, Not a Trigger for RBA Rate Cut

Low Inflation, on Its Own, Not a Trigger for RBA Rate Cut

Data released earlier today showed Australia’s Q1 headline CPI figures came in at -0.2% q/q versus +0.2% expected and +0.4% previous. The trimmed mean CPI stood at +0.2% versus +0.5% expected and against +0.6% last. AUD/USD dived around 100-pips in a knee-jerk reaction to dismal Australian CPI report.

Widespread weakness in import prices suggests very little pass through from the exchange rate which the RBA is relying on to help lift core inflation back towards the middle of their target band between 2.0% and 3.0%. Does the poor inflation data raise chances of a rate cut at RBA May meet?

The RBA clearly stated in their last policy statement that “continuing low inflation would provide scope to ease policy further should that be appropriate to lend support to demand”. The RBA will have to drop their description that core inflation is close to target which will require the RBA to downgrade their inflation forecasts in the upcoming May Statement.

Low inflation, on its own, is not a trigger for a rate cut. RBA will likely wait to see a new weaker trend in domestic activity and employment before it would embark on such a strategy. Markets have however raised the probability for a cut in rates by the RBA to 49% probability vs 16% before the CPI.

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