May rate cut more certain due to low inflation

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The latest inflation figures released by the Australian Bureau of Statistics (ABS) should lead to a rate cut, with some economists even forecasting a cut as much as 50 basis points.

It may be an ambitious forecast but the 0.1 per cent increase in the March quarter of 2012’s consumer price index (CPI) has led many to think of the 50 basis point cut having a 62 per cent possibility.

The release from ABS stated that overall the CPI, “rose 0.1% in the March quarter 2012, compared with no change in the December quarter 2011” and, “rose 1.6% through the year to the March quarter 2012, compared with a rise of 3.1% through the year to the December quarter 2011.”

The result was way below the Reserve Bank of Australia’s (RBA) 2 and 3 per cent target level. Since late 2009, the result is also the lowest recorded annual inflation rate.

Pamela Bennett, president of the Real Estate Institute of Australia (REIA) believes that the RBA now has now no excuse for not doing the much-needed interest rate cut, “The latest figures are well within the RBA’s target zone of 2-3 per cent and should provide a clear message to the RBA to reduce official interest rates at its meeting next week.”

“With inflation well within the RBA’s target zone and a clear message from the Government that there will be a focus on reducing expenditure in the 2012/2013 Budget, it is appropriate to have a cut in interest rates, “ added Bennett.

A Commsec economist, Savanth Sebastian, stated, “Inflation is well and truly contained and the Reserve Bank is all but certain to cut interest rates on May 1st. Not only was the headline inflation rate virtually flat, but the closely-watched underlying measures also recorded decidedly subdued readings”

Shane Oliver, AMP’s chief economist shared in an article in The Adviser, “A 0.6 per cent rise would give you an annual rate of 2.1 so that would be at the low end of the target [of 2.5 per cent]. So numbers around there will be considered benign. Alternatively 0.7 would probably still be okay. If you get to around 0.8 it becomes a bit more debatable. If we do get a 0.8 per cent number then you can’t rule out a rate cut, but the chance of it occurring would be substantially less.”

With the certainty of the rate cut shining brighter, the question in everyone’s head moved to the possibility of a rate cut more than 25 basis points on the RBA’s Board meeting on May 1.

A currency trader at Arab Bank, David Scutt, mentioned, “The question now is, is there room for the RBA to cut interest rates by 50 basis points.”

The CEO of the Real Estate Institute of Queensland (REIQ), Anton Kardash, believes that Australia’s economy badly needs stimulation, “The producer price index yesterday fell 0.3 per cent when most economists had predicted a rise of 0.5 per cent and the Reserve itself is starting to question the reasoning behind recent rate hikes by lenders. All of these signs point to an economy that is certainly not firing on all cylinders, a fact the Reserve noted in its April meeting when it lowered its expectation for growth. The Reserve must act next week and must act decisively.”

Since lenders have been moving rates independently, many are calling out for a 50 basis points cut.

Harley Dale, HIA’s chief economist shared, “The housing industry and wider Australian economy needs a further 75bps of interest rate cuts and there is nothing standing in the way of a 50bp move to get the ball rolling next Tuesday. That would, admittedly, be a bold move for the RBA, but it would be entirely appropriate given the pulse of the Australian economy is not beating as fast as the Bank earlier expected. The banks need to follow suit and pass any rate cuts on in full rather than hide behind the fallicious argument that higher funding costs somehow justify them holding some interest rate relief back.”

An article from The Australian revealed that Citigroup is one of those forecasting a 50 bps cut. Citigroup’s chief economist, Paul Brennan, said, “The case for a 50 basis point in May is reinforced by higher lending rates.”

In the same article Annette Beacher, the senior analyst of TD Securities, shared that the independent moves by retail banks on interest rates would be a major consideration by the RBA. “It’s become a game of chicken between the banks as to who is going to blink first.”

Kardash also believed that the RBA must do something on the lenders’ unjustified moves and help support the recovering Queensland property market stating, “It’s unfortunate that the major lenders insist on achieving profit margins more in tune with the good times rather the current economy reality. In this game of cat and mouse that lenders seem to play with the Reserve and their own customers when the central bank reduces the cash rate, the Reserve must now take back some control and reduce rates by at least 50 basis points on Tuesday.”

The 50 bps cut however seems too unlikely to happen for some as Beacher shared in The Australian, “I don’t think the RBA will cut by 50 basis points because that would be too much of a surprise and the RBA doesn’t have a history of doing that unless there is an emergency. If the RBA order two cuts of 25 basis points they’re also forcing the banks to make two decisions rather than just one.”

Su-Lin Ong, the chief economist of RBC Capital markets declared that the banks independent move is not helping the RBA’s aim which is to stimulate the Australian economy, and that the banks’ moves could force the Reserve Bank to cut 50 basis points. Ong shared, “It’s not out of the question given the policy dilution by the major lenders. But we think that a move like that would look a little panicky and be an admission of policy error.”

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