Rate cut now unlikely

Inflation in sweet spot for Reserve Bank

A MODEST but welcome dose of price growth has dampened the likelihood of another interest rate cut after headline inflation crept back into the Reserve Bank’s target range.

But while the uptick pushes inflation behind property on the central bank’s long list of concerns, it is unlikely to deliver the conditions for a rate rise until well into next year, economists say.

The Consumer Price Index, which measures price growth in goods and services, rose 0.5 per cent in the three months to March, for an annualised rate of 2.1 per cent, official figures reveal.

It was the first time in twoand-a-half years that headline inflation had been within the RBA’s target band of 2 per cent to 3 per cent.

However, core inflation – which strips out the effect of volatile price movements for products such as petrol and tobacco – was 0.4 per cent for the quarter for a more muted annualised reading of 1.8 per cent.

Price movements were varied during the quarter but the impact of post-Christmas retail discounts was apparent.

Petrol was up 5.7 per cent and gas and electricity were up 3.8 per cent and 2.5 per cent respectively – all among the big risers.

But men’s clothing and furniture retailers were in clearance mode, with prices falling 3.8 per cent and 3.5 per cent respectively.

An abundance of summer produce sent fruit prices down 6.7 per cent, although fruit and vegetables were both more than 12 per cent dearer over the full course of the year.

The housing category was up 0.8 per cent.

Paul Dales, Capital Economics chief economist for Australia, said he was now revising his call for two more rate cuts this year, instead expecting the RBA to stay on hold potentially into 2019.

“When taken together with the RBA’s valid concerns that cutting interest rates further would threaten financial stability, (this) data suggests that underlying inflation is now at a level that the RBA will be willing to tolerate,” Mr Dales said.

CommSec chief economist Craig James agreed.

“The Reserve Bank doesn’t need to cut rates again with inflation trending higher, rather than lower,” he said.