Citi now forecasts the RBA to cut rates by a 25bp at its May policy meeting next week.
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"Economic growth doesn’t argue for a rate cut next week. But the breadth of the price weakness in the Q1 CPI and signs that inflation expectations are shifting down suggest the period that inflation will undershoot the 2%-3% target could be more persistent than temporary.
These considerations provide justification for a 25bp easing next week. Even if the RBA passes in May it could ultimately cut as more data likely confirms inflation is staying below target," Citi argues.
"We believe the likelihood of lower inflation forecasts will prompt a response from the RBA. We suspect the CPI result would have been a shock to the RBA. Quarterly headline CPI was the weakest in seven years while quarterly and yearly underlying inflation were the weakest in the 16-year history of the seasonally adjusted underlying series, below the bottom of the 2%-3% target.
This means that even with our previous relatively upbeat forecasts, underlying CPI is now unlikely to return to even the bottom of the target band until Q1 2017. Critically, we view this delay as crossing the line from a temporary phenomenon that the RBA can ignore to a potential problem that policy needs to respond to," Citi adds.
