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Analysts at TD Securities note that the Australia’s March quarter core CPI rose by a feeble +0.2%/q and 1.4%/y, well short of even the most pessimistic forecast.

Key Quotes

“The RBA in February looked for 1.8%/y for June core inflation, and so a new starting point of 1.4%/y is a significant challenge to the Bank’s rosy core scenario of “returning inflation towards the midpoint of the target”.”

“Today’s significant downside miss is a game-changer for our on-hold view. The question is when the RBA cuts, not if, given ongoing GDP growth and inflation disappointment. The pickup in core inflation was painfully slow as it was, and now at 1.4%/y has reversed two years of gradual gains.”

Change of View: We now look for -25bp on 7 May to 1.25%. We do not subscribe to consecutive May/June cuts for two reasons (1) the collapse in BBSW removes any impediment for retail banks to pass on the cut in full and (2) the RBA can assess the impact of the rate cut, and also wait and see how accommodative fiscal policy will be once a new government is formed after the May 18 election. At this stage we lean towards a follow-up cut to 1% in August. The RBA has not delivered consecutive 25bp cuts since 2012.”