Today’s weaker than expected inflation numbers has led to skyrocketing expectation of a rate cut by Reserve Bank of Australia (RBA) next week, when the bank is set to meet to announce decision on November 3.
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ANZ economists Jo Masters and Katie Hill have been expecting a cut from the central bank early next year as the housing market slows. On a quarterly basis, prices grew 0.5 percent, falling short of the 0.7 percent gain estimated by economists. Core inflation was a meek 0.3% on quarter, and 2.2% on year, putting it at the lower end of the Reserve Bank of Australia’s 2-3% inflation target band. The RBA last lowered rates to the historic low of 2.0 per cent in May and is seen as comfortable with the fall in the Australian dollar as it adjusts to significant declines in key commodity prices with a decade-long mining boom unwinding. In that case, the RBA may look to increase interest rates, making it more expensive for businesses and households to borrow money.
Say, for example, your household income is $100,000 and the annual rate of inflation is 2%, your “real” income would be $98,000 ($100,000 – 2% ($2,000)). There was no real hint that a rate cut was under consideration.
Even before the shadow board made its recommendation, most mainstream economists had predicted that the Reserve Bank would leave interest rates unchanged this week. The need for increases was sparked by demands on the banks to hold more prudential capital against the value of their loan books.
TAME inflation has dramatically increased the chances of a Melbourne Cup day rate cut.
Cuts to prices charged by utilities such as electricity providers have resulted in the unusually lower inflation reading for the quarter, Mr. Blythe said.
“Looking ahead, we suspect that the effects of the weaker economic climate will limit the boost to inflation from the lower dollar and will start to weigh on domestically generated inflation too”, he said.
“Inflation prospects have not been an impediment to adding stimulus to the economy in 2015”.
“The likelihood is that the bank will continue to hold interest rates at the current level in the near term, given its concerns about property price developments, but also signs that the economy has been performing somewhat better in recent months, evidenced by above average business conditions and solid employment growth”, he said.
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“And today’s very benign price readings won’t change that perspective”.
