I don’t think we’ll see this story anywhere after the inflation data are released this Wednesday – will we? Could we? Should we?
WEDNESDAY 25 JANUARY 2012:
Today’s consumer price index confirmed that Australia’s inflation rate remained around its lowest level in a decade. In underlying terms, the CPI rose by 2.3% in the year to the December quarter to remain in the lower part of the target range of the RBA.
The ongoing low inflation rate means that cost of living pressures remain comfortable for most Australians. There have now been 10 straight years where average weekly earnings growth has outpaced the rate of inflation, boosting the purchasing power of all wage earners. Further supporting the financial comfort of most Australians have been the unprecedented income tax cuts and increases in pension payments over the past decade. Rises in electricity prices have been more than offset by falls in prices for clothing, electronic goods, computers, household appliances and fruit and vegetables.
The low inflation rate has money markets pricing in further interest rate cuts in the near term. According to market pricing, the RBA is expected to cut the official cash rate by a further percentage point over the next 6 months with a 25 basis point cut priced into the market for next week’s meeting of the RBA Board. This will be the third interest rate cut since November 2011 and will take the official cash rate to 4.0%. Other market interest rates, such as the 10 year government bond yield, have recently fallen to all time lows.
In a damaging development for the Liberal Party’s economic credentials, a 4.0% interest rate would be a level of official rates never once reached under the combined 19 years of the Howard and Fraser governments, despite claims from the Leader of the Opposition, Mr Abbott and Shadow Treasurer, Mr Hockey, that interest rates will always be lower under a Coalition government.
The stunningly low inflation result is a further embarrassment for the Liberal Party, which had policy settings in place in 2006 and 2007 that spurred underlying inflation to a 15 year high of 5.0%. Market economists agree that inflation is currently well under control and is forecast to remain within the RBA’s target range for at least another year, which will help lock in a low interest rate environment.
For mortgage holders, lower interest rates will also be welcome news. The current mortgage interest rate, which is 1.25 percentage points below the level prevailing when the Coalition lost the November 2007 election, is expected to fall although there is some uncertainty about the proportion of cuts in official rates that will be passed on to consumers as banks struggle with a sharp increase in funding costs.
It is also apparent that the tight Budget delivered by the Gillard Government in May 2011 and reinforced in the Mid-Year Economic and Fiscal Outlook in November, is helping to keep inflation in check, with real government spending falling for the first time since the late 1980s.
Economists argue that these issues were important drivers of ratings agency Fitch recently upgrading Australia’s credit rating to triple-A. This saw Australia achieve an unprecedented triple-A rating from all three major rating agencies.