Weak inflation figures put interest rate cuts on the table

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Weak inflation figures have blown the chance for an interest rate cut in May wide open, according to JP Morgan’s Sally Auld.

Speaking to The Age, Ms Auld says the Reserve Bank is likely to cut rates by 0.25 percentage points next week and thinks they’ll repeat the dose in August, which would take the official cash rate down to 1.5 per cent.

In an article by Jens Meyer in The Age, Ms Auld outlines three key reasons why she thinks we’re heading for an interest rate cut next week off the back of the low inflation figures.

Firstly, the poor outlook for global growth has put doubts on how growth with track here in Australia for the rest of the year.

Secondly, Ms Auld says the burden of activity data to deliver growth, which is consistent with above or equal trend growth, is now larger in order to return inflation to target.

Finally, the recent inflation figures will have convinced the RBA that the disinflationary trend is real and has not stabilised.

But not everyone agrees with Ms Auld and plenty economists are of the view rates are a 50-50 chance of being cut at best.

UBS economist Scott Haslem spoke to The Age.

“Given 3 per cent GDP growth and 5.7 per cent unemployment, we doubt a short period of sub-target core CPI is a sufficient condition alone for the RBA tot trim,” he said.

“But it certainly lowers the hurdle for further cuts, should the outlook deteriorate.”

Te official market pricing has indeed put the chance of a rate cut back up to around 50 per cent, and Citi’s Josh Williamson said it was game on next week when the RBA makes its decision.

“So far the signs on the economy would suggest that another cut isn’t needed, particularly with unemployment at 5.7 per cent and the economy growing at around trend,” he told The Age.

“But underlying inflation is lower than expected and well below the bottom of the RBA’s 2 per cent – 3 per cent target.”


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