According to analysts at ANZ, the downward surprise in Australia’s core inflation in Q1 leaves the RBA will little choice but to cut the cash rate by 25bp at its May meeting, with another 25bp likely to follow in August.
“The much lower than expected outcome for core inflation means that something has to materially change in order for the RBA to credibly forecast an eventual return to 2% inflation. That something has to be a stronger growth outlook that puts material downward pressure on underemployment in the labour market.”
“The contribution the RBA can make to a stronger growth outlook is to ease monetary policy which, in its own words, will “support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure.” We have doubts that modest rate cuts will do much to push inflation sustainably higher, but it’s hard to see that the RBA has much choice but to use the tool at its disposal, ie a lower cash rate. We don’t see the timing of the election being a constraint on the RBA acting.”