Australia has not joined the low inflation band wagon rolling along throughout the global economy, in part because the economy remains stronger than in the rest of the world, but also, because the falling Australian dollar has underpinned some price pressures for imported goods and services.
The underlying inflation rate was confirmed at 2.4 per cent in the year to the March quarter – a lowish result for sure, but still a percentage point or two above similar inflation measures around the industrialised world. It is also effectively in the middle of the RBA target zone at a time when interest rates are already super-stimulatory, when the Australian dollar has fallen 30 per cent and the world economy is looking its best in several years.
The inflation rate validates the current low cash rate but it is certainly not so low to scream “urgent rate cuts needed” given the clear turn in the labour market, the boom in housing construction and strong pace of expansion in retail sales. Of course the lingering thorn of strong house price gains and a lift in credit for residential investment purposes remains at the forefront of the economic policy discussion and also works against yet lower interest rates.
The RBA has held off cutting interest rates in March and April, as it wanted to see how the labour market and inflation data would pan out. Well, a sharply better than expected labour market plus a higher than expected inflation result should see it remain on hold. The fact that commodity prices are also higher than a month ago should seal the deal for no change in May.
As mentioned earlier, we may have also seen the last rate cut for the cycle.