Tuesday, 17 April 2012

So what Inflation rate is needed for the RBA to cut 50?

Just about all the market commentary around now agrees that if the March quarter underlying inflation rate comes in at 0.8% or less, the RBA will cut rates by 25 basis points on 1 May.  It is difficult to argue with the broad theme of that judgment.

One question that I haven't seen discussed is what sort of underlying CPI result would compel the RBA to cut 50 basis points on 1 May?

If the underlying inflation rate comes in at 0.5% as quite a few markets people are forecasting, the annual rate of inflation will fall to a 12 year low of 2.3%.  To me, this would be enough for the RBA to cut 50 basis point given the current level of mortgage rates, but what if we get a further downside surprise?  Say underlying inflation comes in at 0.4% with the annual rate dropping to 2.2%?  This would be stunningly low in itself and with a high 0.8% June quarter 2011 CPI dropping out of the run rate next quarter, underlying inflation could fall to a record low in three months time.

Surely this would be enough to get the RBA to cut 50?

The markets people seem to only be arguing about what inflation rate is needed for the RBA to cut or not.  This is too narrow given the performance of the economy more generally.  An additional question should be how low will the CPI need to be for it to cut 50 basis points.  

1 comment:

  1. agree with this, and had been thinking the same