The rate cut crowd can finally celebrate: we will get a rate cut from the Reserve Bank next Tuesday (not this afternoon, contrary to what Tony Abbott thinks) after today’s remarkably low March quarter inflation result from the ABS. The annual rate fell to 1.6%, down sharply from the 3.1% for all of 2011.

And we could get more cuts later in the year if it looks like the upsurge in tension in Europe damages confidence and economic activity.

The weak CPI and the 0.3% fall in the Producer Price Index for the quarter means the RBA board won’t hesitate to cut the cash rate by at least 0.25% to 4% at its meeting on May 1. That realisation saw the value of the Australian dollar fall half a cent, from $US1.030 to $US1.275, this morning. There’s now a real chance the dollar will fall to parity in the next month or so, which will take a small amount of pressure off some sectors of the economy.

There’s a fair bit of static to look through in the CPI result: the unwinding of the impact of higher fruit and veg prices after last year — which saw a flat CPI result for the December quarter — is continuing. Remember how cyclone Yasi damaged the north Queensland banana crop and sent prices surging higher, and how the Queensland floods also sent vegetable prices rising? What goes up must, in this case, come down. Fruit was down 30% in the quarter and those bananas 60%. But the most significant rises were also a little unusual, in pharmaceutical and education costs, both of which are highly cyclical (annual PBS changes, back to school costs).

That’s why the seasonally adjusted CPI was actually slightly negative, and there was also a fall in the RBA’s favoured measures. The Trimmed Mean rose 0.3% in the quarter, down from the 0.5% in the December quarter, while the annual rate fell to 2.2% from 2.6%. the other measure, the Weighted Median saw a rise of 0.4% in the quarter, down from 0.5% with the annual rate easing to 2.1% from 2.6%.

But it’s still a genuinely low result, and one that reflects the actual cost of living for families. The cost of overseas travel might have fallen, but so did clothing and footwear, as well as household goods. Darwin and Hobart saw the biggest CPI rises, then Brisbane and Perth. Sydney was low and Melbourne flat, Adelaide negative. But it’s much of a muchness: this was a low result across the board.

Judging by the tone of the minutes from the April RBA board meeting, there might have been some hesitation about cutting rates further after the May meeting. But the inflation figures surprised on the low side (economists were forecasting increases of 0.5% to 0.7% in the quarter) and that means all the main measures of inflation are now at the bottom of the central bank’s 2% to 3% inflation target range, allowing more cuts later in the year if the political problems in Europe re-ignite strains in the financial system and see the eurozone economies fall deeper into recession.

Since late last year, the RBA has indicated that Europe is the biggest external threat to the Australian economy and even though fears had eased in the first quarter thanks to the European Central Bank’s two rounds of three-year loans to banks across Europe. But they never fully went away.

Now the austerity plans for Europe, devised by Germany, the Netherlands, France and Finland are being rejected by voters and hard-right and left-wing politicians in France, the Netherlands. So watch Europe, there might be more in what happens there for the future path of Australian interest rates than what happens in our economy in the next few months.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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