Because RBA should cut liquidity in May

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Zero percent.

This was the number of shocks that emerged last week that could force the Reserve Bank to cut interest rates for the first time in more than two and a half years.

Data from the Australian Bureau of Statistics showed that inflation came to a halt in the March quarter with the consumer price index registering 0.0%, bringing the annualized rate to 1, 3%.

The unexpectedly soft inflation reading, which came after just as modest economic growth figures in March, has the financial markets seeing an increase in the likelihood that the RBA will cut liquidity when the council meets next Tuesday.

The RBA recently reduced the liquidity rate to the all-time low of 1.5 percent in August 2016, after a previous cut to 1.75 percent in May. There was no rate hike since November 2010.

Cameron Kusher, head of CoreLogic research, said that persistently low inflation will probably be what ultimately forces the RBA to act.

"The RBA has exceeded its inflation target for four years," Kushner said.

"The most recent CPI figures were much lower than they expected. The RBA's rhetoric was inflation which will gradually return to the 2-3 percent range, but the latest figures show that if is going adrift ".

The RBA could "potentially start losing face" if it continues.

"They have kept rates for 30 months and now expect inflation to increase and it has not," he said.

Kusher warned that since the financial crisis "things are dark".

"People consider low rates as a great thing, when the reality is that they try to encourage people to spend," he said.

"Higher rates mean increasing wages and the economy is going well. It is a bit worrying that we have already recorded low rates and we are talking about lowering them".

The rate cuts are a "very obtuse instrument", he added. "Help mortgage holders, but it doesn't help people try to save. There will always be winners and losers."

Although the RBA reduces rates, the flow to mortgages is not guaranteed.

Banks have raised rates since the second half of last year because interest rates in foreign markets, where they receive most of their wholesale financing, have risen in line with the US Federal Reserve.

The average standard rate of principal and interest is currently around 4.41% for owner occupants and 4.85% for investors, according to Canstar.

AMP Capital chief economist Dr Shane Oliver forecasts two rate cuts this year, bringing the discount rate to 1%.

"A rate cut, whether it is May or June or July, will tell us that the Australian economy is not growing as fast as it could or should and inflation continues to remain too low," said Dr. . Oliver.

"He is not saying that we are in recession or that unemployment is about to increase, but he is saying that growth has slowed down and this is a risk for the economy".

One of the main factors causing sluggish growth is falling house prices.

Sydney and Melbourne have now fallen by 14.5% and 10.9% compared to their respective peaks in July and November 2017, the worst falls recorded.

Data released on Wednesday showed that the pace of declines seems to slow down, weakness is spreading in regional areas and in previous resilient cities like Hobart.

"The housing crisis is weighing on consumer spending," said Dr. Oliver.

"The pressure has been increased by the very low inflation numbers we saw last week. Initially, we were looking for two rate cuts in August and November, but the CPI numbers carried it forward."

So what is causing persistently low inflation?

"The simple answer is the limited demand in the economy, which is leading to ongoing reserve capacity," said Dr. Oliver.

"When companies have spare capacity, they discount and compete heavily. An obvious example of that unused capacity is that 13% of the workforce is unemployed or underemployed – the equivalent number in the United States is 7%."

C is an "added overlap" of competition from technological innovation.

Airbnb, Uber and Amazon have put pressure on "big chunks" of the economy like hotels, transport and retail that in the past had more limited competition.

"We are spending more and more of our online dollar, which of course is creating problems for brick and mortar retailers, which they have to serve," he said.

ABS said that the result of the CPI for the March quarter is due to the increase in prices in a number of goods and services "completely offset by a series of price declines".

"The most significant increases in the March quarter were vegetables (+7.7 percent), secondary education (+ 4.2 percent) and motor vehicles (+ 2.4 percent)", has affirmed the ABS.

"Drought and adverse weather conditions continue to reduce the selection of fruit and vegetables".

The increases were "offset by drops in automotive fuel (-8.7 percent), national holidays, travel and accommodation (-3.8 percent) and holidays, travel and international accommodation (-2.1 percent)".

Prime Minister Scott Morrison would not have been drawn on interest rates last week.

A rate cut at the RBA meeting on 7 May, just under two weeks from the May 18 election day, would undermine the Coalition's message that the economy is strong.

"Don't speculate on what the Reserve Bank does," Morrison told reporters in Townsville on Friday.

"They are their decisions and I am happy that they make these decisions."

But the treasurer Josh Frydenberg said that if there was a cut, the banks must pass the reduction in full.

"I would tell the banks to treat your customers first," Frydenberg told reporters in Melbourne.

"Put people before profits and pass through them the real benefits that come from any interest rate changes."

The treasurer of the shadow, Chris Bowen, declared at the AAP that the Prime Minister was a stranger to the workers.

"Whenever Scott Morrison and the liberals tell Australians how much the economy is traveling below them, there seems to be new data showing that things are going in the wrong direction," said Bowen.

"Just a few weeks ago, the government's budget showed that economic growth is falling, consumption is falling and wages have fallen."

frank.chung@news.com.au

– with AAP

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