Shane Oliver, head of investment strategy and chief economist at AMP Capital said that they had been expecting a cut since last December and it finally seemed it may happen.
“We have been looking for two rate cuts this year since last December and had thought that the RBA would wait till after the election before starting to move.
“However, with underlying inflation coming in much weaker than expected our base case is now that the first cut will come next month, with the RBA likely to conclude that it’s too risky to wait until unemployment starts to trend up,” he said.
Mr Oliver said the march quarter consumer price had showed flat headline inflation over the quarter but the bigger downside came from weaker underlying inflation.
“Underlying inflation, as measured by the trimmed mean and weighted median, averaged 0.2 per cent over the quarter and 1.4 per cent over the year which missed consensus expectations of 0.4 per cent quarter on quarter and 1.7 per cent year on year,” he said.
The Reserve Bank uses underlying inflation as a guide to fundamental price trends said Mr Oliver and currently it was tracking below their target.
“Inflation continues to track below the RBA’s 2-3 per cent target band and the central bank is likely to revise down its inflation forecasts,” said Mr Oliver.
The largest price rises came from seasonal sources like education and food prices, but these were offset by fuel price falls and holiday travel falls.
“While the petrol price has since bounced back the lack of underlying pricing pressure in the economy is evident in pricing weakness across areas like clothing, rents, household equipment and services and communications.
“The weakness in underlying inflation shows that businesses are still finding it challenging to lift prices in the face of ongoing spare capacity, intense competition and weak demand,” he said.
Mr Oliver said that the march quarter missed the RBA forecasts and meant that the Reserve Bank was likely to downgrade its inflation forecasts yet again next month.
“The longer inflation undershoots the 2-3 per cent target, the greater the risk that the target will lose credibility.
“This in turn will see low inflation expectations become more entrenched making it in turn even harder to get inflation back to target,” he said.
