Interest rates may hit record low

Record low inflation figures may be a “game changer” when the Reserve Bank of Australia meets to discuss interest rates next Tuesday, according to analysts.

The official cash rate is two per cent, but may be cut to a new low of 1.75 per cent in the wake of the release of lower than expected inflation figures.

The cash rate has been unchanged since last May.

AMP chief economist and head of investment strategies Shane Oliver said there were several reasons the RBA could cut interest rates next week, but the very low inflation numbers would “push them over the line”.

“I had started to think that it wouldn’t be May because recent health figures have been quite solid and the unemployment has actually been falling, so that might set it to later,” he said.

“But now with the inflation figures so far below the target, I think that will probably move next week.

“On top of all that, the Australian dollar is too high, so the banks are under pressure to raise their mortgage rates out of cycle from the RBA because of higher funding costs, which the RBA would be keen to offset.”

HSBC Bank Australia chief economist Paul Bloxham also said the RBA would look to combat the low inflation figure.

“I think that the downsize in inflation yesterday was significant and make it highly likely that the RBA is going to need to pick up the cash rates further,” he said.

“The question is just about timing and whether it comes sooner rather than later. Once you know that inflation is below, it’s best if you move as soon as you can. So, even though it’s a Budget day and it’s less than ideal for the RBA, I do think they will likely cut rates.

“Given the magnitude of the downsize of inflation, the RBA will probably have to do more than just one cut, and we’ve got another cut pencilled in for the end of the third quarter as well.”

Despite the low inflation results, not all experts think the RBA will push through a rate cut next week.

St George chief economist Hans Kunnen said there would have to be other changes to the economy for such a cut to be made.

“It’s getting liable with inflation going down the way it is, but i don’t know that the economy is deteriorated and that the inflation is far enough away from the target to cut rates down,” he said.

“I think they may want to see what is in the Budget and wait for the next national account, which will give a fuller picture of activity in the economy.”