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James Hyerczyk
Reserve Bank of Australia

Tuesday and Wednesday’s back to back plunges in the Australian Dollar are the markets way of saying a near-term Reserve Bank of Australia (RBA) interest rate cut is now a real possibility following the release of another weaker-than-expected Australian inflation report earlier today.

According to a government report, Australian consumer inflationary pressures weakened further during the first quarter, increasing the chances the RBA will cut its official benchmark interest rates in the months ahead.

Early Wednesday, the Australian Bureau of Statistics (ABS), reported that headline consumer price inflation (CPI) was unchanged in the three months to March, producing a slow annual increase of just 1.33%. This was a steep drop from the 1.78% reported in the year to December last year. Traders had priced in a quarterly increase of 0.2% and a year-ended rate at 1.5%.

The ABS Said ….

“The [unchanged reading] was a result of price rises in a number of goods and services being fully offset by a number of price falls,” the ABS said. “This was consistent across most of the capital cities.”

“Drought and adverse weather conditions continue to reduce the supply of a selection of fruits and vegetables,” it said.

“Lower world oil prices at the end of 2018 saw automotive fuel prices fall 6.1% in January, before rising in February and March,” the ABS said.

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Trimmed Mean CPI Important to RBA Policy

Of more importance when it comes to the outlook for monetary policy settings from the RBA, underlying inflation rose by 0.19% during the quarter after seasonal adjustments, a result well below expectations for a larger increase of 0.4%.

Underlying inflation is defined as the average of the trimmed mean and weighted median inflation figures released by the ABS.

Trimmed Mean CPI was the weakest quarterly increase on record, surpassing the previous record set in the March quarter of 2016. At that time, the RBA cut rates twice within the next three months to counter the weakness in core inflation.

The main takeaway from the report is that quarterly inflation fell to an annual rate of just 1.42%. This put it well below the bottom of the RBA’s 2-3% medium-term target. With underlying inflation decelerating away from the RBA’s mandated level, the odds of a central bank rate cut over the near-term are accelerating.

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