Low inflation gives RBA a green light for a pre-election rate cut
Apr 2016 - News
If the Reserve Bank is inclined to cut interest rates but is hesitant because of the election campaign, it now has the perfect excuse.
The most widely quoted measure of underlying inflation is running at an annual rate of just 1.7 per cent, which is below the RBA’s target and well short of expectations.
The RBA’s forecast, published in February, was for an underlying inflation rate of 2 per cent, with inflation in the March quarter of 0.5 per cent.
The actual underlying inflation rate in the quarter was less than half that, at 0.2 per cent.
Why might the bank be inclined to cut rates? The economy has been doing better than expected.
According to the national accounts, the economy entered 2016 growing at a solid annual rate of 3 per cent.
Employment is growing at an annual rate of 2 per cent, with the unemployment rate down at 5.7 per cent in March. This is against the background of a rebound in iron ore and coal prices.
However, the surge in iron or and coal prices is unlikely to be sustained and the Australian dollar has appreciated by more than is justified by the increase in export prices.
As a result there appears to have been a significant tightening of monetary conditions since the beginning of the year which, if it is sustained, could be a serious impediment to the non-mining business investment and the economy’s successful transition out of the mining investment boom.
Partly reflecting this, the minutes of the RBA’s April board meeting reported that the board considered it appropriate for monetary policy to be “very accommodative”.
This phrase attracted attention because monetary policy previously had been described as simply accommodative.
The board probably was not then adopting a much stronger easing bias, because the statement by the governor, Glenn Stevens, after the meeting contained no hint of such a change.
But the March quarter inflation number undoubtedly could send people’s think in that direction.
Stevens already has demonstrated that he is prepared to change interest rates in the midst of an election campaign if that is deemed appropriate.
However, the closer the move is to its proximate cause, the better.
Therefore, if the RBA concludes that it is very likely to want to cut the cash rate between now and the election, now might be a good time to do it.
