Ahead of the May 3 budget and the looming federal election, the quarterly deflation figure underscored the challenges facing the Australian economy, which include sluggish wages growth and a choppy transition from a mining-reliant to services-based economy. On the upside, the figures mean goods are more affordable for consumers. Under the Taylor Rule interest rates are raised or lowered according to whether output is above or below trend and inflation is above or below its target level. Credit:Fairfax During the 2013 election campaign, then opposition leader Tony Abbott argued that if "interest rates go down, it is because this government is presiding over an economy which is in much more trouble than government has previously been prepared to admit". But Labor Treasury spokesman Chris Bowen declined to make similar criticisms on Wednesday, arguing the RBA's decision to cut rates during the 2013 election had prompted "all sorts of negative comments about the performance of the Australian economy after the RBA cash rate was cut to 2.5 per cent". "The RBA cash rate currently stands at 2 per cent. Labor's position on monetary policy is the same now, as it was in 2013, and earlier. That is, that we don't comment on movements in monetary policy and the RBA should continue making such decisions without fear or favour."

Independent economist Saul Eslake agreed the inflation figure had given the RBA the scope to cut rates but "it doesn't mean they will". He added that the deflation figure "nothing to do with the Coalition at all", a view backed by Industry Super Australia chief economist Stephen Anthony, who said Australia was "part of a stagnation across advanced economies". Treasurer Scott Morrison. Credit:Alex Ellinghausen With Labor's policy to limit negative gearing to new properties and halve the capital gains tax discount already shaping as one of the key policy differences between the two major parties, a rate cut on budget day, or at the June meeting in the middle of the campaign, would represent another curve ball in already volatile political environment. The prospect of an interest rate cut firmed as an Essential Media poll found Labor leading the Coalition 52-48 in the two-party preferred vote, and as the government appeared set to offer modest tax cuts to correct for bracket creep and tighter rules on superannuation tax concessions, but no change to the current negative gearing rules in the budget. The inflation figures released by the Australian Bureau of Statistics showed the consumer price index (CPI) contracted by 0.2 per cent in the three months to the end of March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December.

The ABS said the price falls were broad based, led by fuel and fruit but including transport, travel, accommodation, recreation and culture. The figures drove the Australian dollar down more than 1.5 per cent. CommSec economist Savanth Sebastian said underlying inflation was "under shooting the 2 to 3 per cent target band [set by the RBA] and that suggests little risk in cutting rates a little further". A 0.25 percentage point rate cut, the first since May 2015, was therefore in prospect. "CommSec believes there is a strong chance the Reserve Bank will cut the cash rate to a historical low of 1.75 per cent in May." The NAB said a May rate cut would be a "close call" but that it "now expects the RBA Board to endorse a [0.25 percentage point] rate cut at its May board meeting".

Coalition political strategists argued that a rate cut either on the eve of, or during, an election campaign would probably not hurt the Turnbull government because it put more money in people's pockets. HSBC chief economist Paul Bloxham said there was now "no denying that inflation is too low, which means that the cash rate almost certainly needs to be cut ... we now expect that a cut in May is likely, despite the budget. We now also expect a follow-up 25bp [basis point] cut in Q3". The Coalition also attacked the Opposition on Wednesday for what it said were plans to revive a carbon tax, after Bill Shorten announced Labor would reintroduce an emissions trading scheme. A spokesman for Mr Morrison said Labor's proposed new taxes would hit consumer confidence, which would be bad for jobs and growth. Follow us on Twitter