After the inflation data, the chances of an RBA rate cut in May are almost 50-50

Two-up in a Sydney bar. Image: Ezra Shaw/Getty Images.

Even a fraction of a percentage point in a major data release can move markets, and that’s the case with Australian consumer price inflation.

The ABS today revealed core inflation, which is highly influential on Australian monetary policy, rose by 2.35% in the year to March. The increase, only 0.05% above the upwardly-revised 2.30% level of Q4 2014 and expectations for a decline to 2.25%, has seen market expectations for a 25bps rate cut in May drop.

This chart, courtesy of the ASX, shows the change in expectations for a rate cut leading into today’s inflation report.

Before the report cash rate futures put the odds of a 25bps cut at a two in three. Following its release the probability has fallen to almost 50/50.

While markets think the RBA decision is basically a flip of a coin, the vast majority of the economic community believe the RBA will still cut rates in May.

Following the release ANZ, CBA and Capital Economics have all reaffirmed their view that, despite the uptick in core inflation, the RBA will cut rates to another record low next month.

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