Rate cut on horizon as inflation dives

Updated

Sorry, this video has expired Video: Inflation figures point to rates cut (7pm TV News NSW)

The Reserve Bank has the all-clear to cut the official interest rate next week after consumer prices stalled in the first quarter.

The latest Consumer Price Index from the Bureau of Statistics shows prices rose just 0.1 per cent in the three months to March, falling well short of expectations.

Australia's annual inflation rate fell sharply to 1.6 per cent, down from 3.1 per cent 12 months ago and well below the central bank's target range of 2 to 3 per cent.

Federal Treasurer Wayne Swan described the figures as welcome at a time when "too many households are doing it tough", and used the result to defend his pursuit of a small budget surplus.

Economists surveyed by Bloomberg had expected a rise of 0.7 per cent for the quarter, with a fall in the annual rate to 2.2 per cent.

Prices fell most sharply for fruit (down 30 per cent), computers and audio visual equipment (down 6.3 per cent) and furniture (down 6 per cent).

The largest price rises were largely for necessities including: pharmaceuticals (14.1 per cent), secondary education (7.7 per cent), tertiary education (4.7 per cent) and petrol (2.5 per cent).

Underlying inflation, which is the RBA's preferred measure as it excludes the most volatile price movements, rose 0.3 per cent in the quarter for an annual rate of 2.2 per cent.

The RBA indicated after its board meeting earlier this month that it could ease the cash rate, which is at 4.25 per cent, if the inflation figures were weak.

Westpac chief economist Bill Evans told News 24 he expected the central bank to ease the cash rate by 25 basis points when it meets early next week.

"The Reserve Bank has held off but now clearly the inflation story, which of course is their number-one policy target, is now saying that rates are too high," Mr Evans said.

"Their core number is only 2.15 now - it's at the bottom of the band - so we will see a rate cut next week."

Mr Swan denied that the low inflation figures were a sign of a weakening economy and said delivering a surplus on May 8 would give the central bank "maximum flexibility" as it makes its monetary policy decisions.

"There's no doubt that solid growth, low unemployment and contained inflation is a very, very healthy combination, and with growth returning to trend it is appropriate to return the budget to surplus," Mr Swan said.

Federal Shadow Treasurer Joe Hockey said the figures confirmed that the costs of key services including electricity, water and childcare were increasing faster than average incomes.

Despite describing overall inflationary pressure as benign, Mr Hockey said the Government should abandon the carbon tax if it cared about cost-of-living pressures.

Shortly before the announcement, Opposition Leader Tony Abbott mistakenly suggested the Reserve Bank would be making a decision on interest rates today.

The bank holds its monthly board meeting on the first Tuesday of every month, except in January.

The Australian dollar dropped more than half a cent against the greenback after the announcement and at 11:45am (AEST) it was worth 102.7 US cents.

Topics: business-economics-and-finance, economic-trends, money-and-monetary-policy, australia

First posted