If it wasn’t already the case, tomorrow’s March quarter Australian consumer price inflation (CPI) report could well determine whether the RBA will cut interest rates in May.
On the decision to leave the cash rate on hold at 2.25% at their April monetary policy meeting the RBA minutes had this to say:
“Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year”.
Clearly the RBA board sees this release as significant. While not always the case, they have a tendency to adjust monetary policy in April, May, August and November, which immediately follow the ABS’ quarterly CPI release. Conveniently, as was the case in February, it also affords them the opportunity to explain their decision in the quarterly statement on monetary policy following these meeting dates.
While tomorrow’s report is unlikely to show anything other than subdued inflationary pressures – current market expectations are for the core CPI reading, favoured by the RBA, to increase 0.6% for the quarter, leaving the annual rate at just 2.2% – the question is whether it will be enough to see the RBA cut rates in May.
Heading into tomorrow’s release financial markets put the odds of 25bps cut during this meeting at 2 in 3. One suspects that if the CPI number prints at or below market expectations a rate cut in May will move to close to fully priced.
However, should the number come out hotter-than-expected, cut expectations for May, and later in the year, will diminish significantly.
This is especially so given the RBA’s heightened uncertainty about how borrowers and savers would respond to any further rate cuts.