The Australian dollar has taken another hit after inflation completely evaporated in the March quarter, boosting chances of a Reserve Bank interest rate cut sooner rather than later.
Annual inflation slowed to 1.3 per cent for the 12 months to March 31 after the consumer price index showed zero growth in the quarter, falling from 0.5 per cent in the previous three months and undershooting the weak 0.2 per cent expected by the market.
After three years of below-target inflation and GDP growth forecasts being revised downward, economists said the RBA could now cut the cash rate from its record low 1.5 per cent as soon as May.
The futures market had already priced in at least one rate cut before the end of 2019, with many economists predicting two 0.25 percentage point cuts.
Indeed APAC economist Callam Pickering said Wednesday’s figures pointed to deep underlying issues across the Australian economy, and created a compelling argument for the RBA to cut.
“These are problems that, if the past three years are any indication, won’t go away on their own,” Mr Pickering said.
“Rather than waiting a few months for employment growth to converge with the myriad of weak economic measures”.
Sarah Hunter from BIS Oxford Economics said Wednesday’s data suggested that core inflation will undershoot the RBA’s projection of 1.75 per cent year-on-year in the June quarter, increasing pressure to cut the cash rate in the second half.
“For now at least, the disconnect between employment growth and wage increases is continuing,” Ms Hunter said.
The Australian dollar, which was already falling, immediately dropped another half cent against the US dollar on the data’s release.
The Aussie was trading at 70.36 US cents at 1327 AEST.
The most significant rise in the March quarter was the 7.7 per cent increase in vegetable prices as drought and adverse weather hit food production, while there was a 4.2 per cent rise for secondary education, and a 2.4 per cent rise for motor vehicles.
The rises were offset by an 8.7 per cent fall in automotive fuel, a 3.8 per cent fall in domestic travel and accommodation, and a 2.1 per cent fall in international travel and accommodation.