Fortunately for the economy and jobs, the RBA uses its estimate of underlying inflation and not just headline inflation to determine inflation pressures and based on that, what the appropriate level for official interest rates should be. If petrol prices are stripped out of the June quarter headline inflation rate, quarterly underlying inflation will be close to 0.6 per cent and in annual terms, just 1.7 per cent which is below the bottom of the RBA target range.
With oil and therefore petrol prices flat in the last month or so, it is unlikely that there will be a similarly high inflation reading in the next quarter based on trends in petrol. Add to that benign inflation outlook is an economic growth performance that in recent months has seen retail sales growth stall, new dwelling approvals top out and the business investment climate remain weak and the case for a big more of a policy heart-starter for the economy seems compelling.
A further interest rate cut will see official interest rates at a never before seen 1.5 per cent.
Variable mortgage interest rates, which are already below 4 per cent in some instances, will be cut further which will free up cash flows for those with existing debt and lower borrowing costs for those looking to enter the market.
Before the global financial crisis, it was just about impossible to contemplate Australian interest rates falling to 1.5 per cent or less, as some forecasters are now speculating. But so too were ideas of negative interest rates which are now dominating much of the industrialised world.
Weak growth, disinflation and high unemployment remain ugly aspects of any economy. Since the GFC unleashed these problems, policy makers have been trying to reverse these problems. The success has been markedly better the policy response in the 1930s Great Depression even though economic conditions are generally sluggish.
The RBA is part of the super stimulatory policy framework and another rate cut would net week would be a further step in that direction.