The Australian Bureau of Statistics has released figures putting the Consumer Price Index at a meager 1.3 per cent – the lowest in almost three years.

This news removes the prices-related impediment preventing a further rate cut by the Reserve Bank of Australia when they meet next Tuesday week. The RBA have made no secret of their goal to maintain Australia’s inflation at between 2 and 3 per cent. But rather than be swayed by blue-ribbon statistics like CPI the RBA base their decision on ‘underlying’ factors. These factors put the average closer to 2.4 per cent, according to the ABS report – a figure higher than predicted by most economists.

Chief economist for HSBC, Paul Bloxham said: “The underlying measures were a little stronger than was expected. Add this to the recent upside surprises in the employment and retail sales data, as well as the still booming Sydney housing market, and the case for a near-term cut in the cash rate is weakened. Reflecting this, the market is now pricing a 50-50 chance of a cut in May.”

This figure is 14 points down on the 64 per cent held by the futures market prior to the release of the CPI figures.

Yet Mr Bloxham believes the key to Australian economic growth will be the RBA reducing the cash rate to 2 per cent next month.

Savanth Sebastian, economist with CommSec, also believed there would be a 0.25 per cent drop on Tuesday.

“Despite the mildly higher than expected readings on underlying measures, the Reserve Bank can comfortably ignore inflation and discuss merits of another interest rate cut on the economy. Policy makers will focus more attention on the labour market, shifts in the Aussie dollar and retail activity in coming months.”

But not everyone agrees. James McIntyre, senior economist with Macqarie, believes the RBA will keep rates steady.

“Rates are still headed lower, just later. After the March RBA board meeting we shifted our forecast rate cut out to August, and added a second rate cut in November. We see no reason to shift that view based on the CPI data.”

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