Rate cut looming for investors

Ahead of the Reserve Bank’s board meeting on Tuesday, some are tipping that a cash rate cut could be on the cards for May.

The ASX futures market has reacted to yesterday's surprise drop in the consumer price index (CPI) by pricing in a 53 per cent chance of a rate cut on Tuesday 3 May.

The CPI for the March 2016 quarter was up 1.3 per cent year-on-year – but down 0.2 per cent quarter-on-quarter.

The ASX 30-Day Interbank Cash Rate Futures market reacted sharply to the news, with the market expectation of a decrease to 1.75 per cent in the cash rate increasing from 16 per cent to 53 per cent by close of trading.

At 1.3 per cent, the CPI had its lowest annual increase since the September quarter 2009; and at 1.55 per cent year-on-year, underlying inflation is at its lowest level on record (dating back to 1983).

With both core and underlying inflation now below the RBA's target band of 2 to 3 per cent, HSBC is now expecting a 25 basis point cut to the cash rate on Tuesday, "despite the federal budget being on the same day".

AMP Capital chief economist Shane Oliver said the "clear message" is that pricing power is very weak in the Australian economy, reflecting weak demand growth.

"It’s doubtful that the recent bounce in the [Australian dollar] had much impact on the March quarter inflation outcome as the bounce really only started in March which is a bit too late to have much impact," Mr Oliver said.

"It would be dangerous to extrapolate from the fall in the March quarter CPI and conclude that Australia is now at risk of deflation on an annual basis, because the plunges in petrol and fruit prices are unlikely to be sustained," he said.

Both headline and underlying inflation are now running "well below" the RBA's target inflation range of 2 to 3 per cent, Mr Oliver noted.

"While this is not a problem for short periods, the risk is that thanks to a combination of deflationary pressures globally, soft demand domestically and very weak wages growth, inflation could remain well below target for an extended period," he said.

"This is a risk that the RBA cannot ignore and as a result we remain of the view that the RBA will cut interest rates again in the months ahead.

"While we had virtually given up on a cut at its May meeting next week after recent solid jobs data, there is now a reasonable chance that it may move next Tuesday," Mr Oliver said.

 

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