Low inflation in the March quarter has cleared the way for the Reserve Bank of Australia to cut rates at its May 5 board meeting, but will the central bank wait until June to see what’s in the 2015-16 federal budget?
There’s no tradition of the RBA observing a pre-budget ceasefire — it has both raised and lowered rates at its May meetings in recent years. And Treasury head John Fraser is on the RBA board, so he’ll be able to give a broad picture of the budget’s direction and Treasury’s growth forecasts.
But after the way the government botched the budget last year, the RBA would be entitled to wait and see what happens on May 12, and assess the budget’s likely impact.
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Market analysts yesterday said the CPI rise of 0.2% and 12-month rise of 1.2% left ample room for a rate cut, as did the Reserve Bank’s preferred core measures, the trimmed mean and weighted median, even though there was a slight rise to an annual to 2.4% rate from 2.3% in the December quarter for the weighted mean measure. That’s still well within the RBA’s range of 2% to 3% over the medium term.
The low inflation report was due to low petrol and oil prices — as expected (lower fruit prices also helped) offsetting a rise in the cost of tertiary education and domestic travel and accommodation.
The minutes of the April board meeting suggested the bank was waiting for the inflation data for the March quarter:
“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.”
But a three-week wait will provide more data for the March quarter on business investment, retail sales, building approvals, the current account. It’s all backward-looking, of course — the June meeting is a day before the release of the March quarter GDP figures — but the additional data, especially on jobs, will enable it to make a more considered decision on raising rates.
It will also enable the bank to see what last-minute changes the government has slipped into the budget papers. Last year’s budget process was badly delayed and resulted in a number of measures being inserted at the last minute.
This year’s process doesn’t appear to be on schedule either, with Joe Hockey being absent for a whole week at G20 meetings at a critical stage of the budget preparation (Wayne Swan used to attend such meetings too, but kept the excursion as short as possible in order to keep the budget preparation on track).
As we noted earlier this week, Glenn Stevens has made it clear what he wants to see in Hockey’s budget: more near-term fiscal help in boosting sustainable growth to supplement the Reserve Bank’s own stimulatory efforts with monetary policy, while addressing the “persistent gap we are likely to see (under current policy settings) between the government’s permanent income via taxes and its permanent spending on the provision of good and services”.