The Reserve Bank of Australia seemed stuck with no other option than to lower its official cash rate. Consumer prices were expected rise so the rate was not changed.
The Australian Bureau of Statistics (ABS) reported that the headline inflation, or CPI, remained stable during the first quarter of 2017. However, the annual decline in CPI was 1.78% (compared to 1.33%). This was contrary to market expectations for a 0.2% increase and was the slowest reading of 2016 so far.
Su-Lin Ong, the chief economist of RBC Capital Markets and head of Australian research, is Su-Lin Ong. According to him, this could lead the central bank’s official rate to be reduced. It has been held at 1.5% for over two years.
“The data show a weakening of inflation and indicate that it will slow down in the early part of 2019, despite a very inflationary backdrop. It is important to point out that the inflation pulse moved in an opposite direction from what the RBA predicted. This makes it more likely that the RBA will reduce the rate,” she said.
James Glynn of Wall Street Journal is a Wall Street Journal industry observer who said there’s a possibility that the RBA will reduce the official rate by as much as four more times before the end of the year. This could happen next month in advance of the Federal Election, which is scheduled for 18 May.
Also Read: RBA braces for a 30% home price downturn
Glynn stated that the next cuts will reduce the cash rate from 1.5%, the record low, to below 1 % and to levels that would cause the RBA to not even discuss the possibility of balance sheets expansion if economic conditions turn bad.
Glynn believes that home-loan borrowers might feel a sudden shift, if this becomes a fact.
He stated that “the impact on variable rates should not be slow” as substantial drops in wholesale financing costs in the past months would leave banks without other options than to pass the reductions.
Glynn believes that a rate cut would help alleviate concerns about the housing crisis as well as improve consumer sentiment.
There’s still a possibility that the RBA will not reduce rates. Glynn indicated that the bank could depend on unemployment figures that are at their lowest point in eight year.
“After all, the unemployment rate in New South Wales, the country’s most populous state, is at the same level last seen in the 1970s,” he said.
However, market watchers and economists still expect RBA to feel the pressure to cut rates — Capital Economics economist Ben Udy is one of them.
“Today’s data will put increasing pressure on the RBA to cut interest rates. Business Insider Australia was informed by him that there are more chances of a rate cut in the future, possibly as early May.
Business Insider was also told by Callam Pickering (Ethos economist for APAC) that the RBA should reduce rates next month.
He said that the RBA should lower rates at its May meeting and not wait for the weak economic measures to catch up.
