- Australian consumer inflation expectations hit the lowest level on record in April, according to Roy Morgan Research.
- In the past decade, when inflation expectations have declined, the RBA has typically cut official interest rates.
- Financial markets and almost every economist surveyed by Bloomberg expect the RBA will cut Australia’s cash rate next week.
Australian consumer inflation expectations hit the lowest level on record in April, likely contributing to the recent shift from the Reserve Bank of Australia (RBA) to adopt an easing bias, implying that Australia’s cash rate is likely to be reduced in the months ahead.
Over the next two years, annual inflation is expected to average 3.7%, according to Australians surveyed by Roy Morgan Research, surpassing the previous record low of 3.9% set in late 2016.
The chart below from Roy Morgan Research shows the change in average annual consumer inflation expectations since the start of the decade, including that reaction function from the RBA to changes in those expectations.
“The decline in Inflation Expectations as measured by Roy Morgan mirrors the decline seen in the ABS CPI figure which dropped to a neutral “0%” in the March quarter 2019 for an annual CPI of only 1.3%,” said Michele Levine, CEO at Roy Morgan Research.
“This is one of the lowest ABS CPI estimates since the Global Financial Crisis in 2008-09.”
While Australia’s March quarter consumer price inflation (CPI) report was very weak, coming in below the RBA’s expectations, it’s been the recent lift in Australia’s unemployment rate from 4.9% to 5.2% that has seen the bank adopt an explicit easing bias, reflecting that softer labour market conditions, particularly if sustained, will make it more difficult to boost wages and economic growth and return underlying inflation to the bank’s 2-3% medium-term target.
With inflation expectations also falling to record lows, there’s an increased risk that consumers will see the weak inflation outlook as becoming entrenched, potentially weighing on investment and spending decisions in the period ahead, especially if views on future wage increases are also lowered.
In a speech last week, RBA Governor Philip Lowe said the bank will “consider the case for lower interest rates” when it next meets on June 4, paving the way for a likely reduction in Australia’s cash rate to 1.25%, the lowest level on record.
Financial markets, and all economists bar one surveyed by Bloomberg, expect the RBA will cut the cash rate by 25 basis next week.
Another 25 basis point rate cut is also expected before the year is out, with another possible reduction — taking the cash rate to just 0.75% — seen as a line-ball call by the second half of next year.
NOW READ: Speculation over the RBA launching QE continues to grow, even before it’s actually cut rates
Business Insider Emails & Alerts
Site highlights each day to your inbox.