News Analysis: Australia's central bank unlikely to pull easing trigger

Australia's central bank is unlikely to cut rates at its monthly policy meeting next week, or the potentially the rest of the year, despite weaker than expected core inflation data falling well outside the Reserve Bank of Australia's official target.

Australia's consumer price index fell 0.2 percent in the March quarter for headline inflation of 1.3 percent over the year, the Australian Bureau of Statistics said on Wednesday, weighed by falling oil prices and the high Australian dollar which has risen five percent so far this year.

Underlying inflation, which strips out volatile price movements, rose 0.15 percent for a 1.55 percent over the year reading, well below the RBA's two to three percent target band for the sixth straight quarter.

The low CPI is putting pressure on RBA governor Glenn Stevens to cut the cash rate from its already record low 2.0 percent, where its been for nearly 12 months, at the bank's policy meeting on May 3.

The market is now pricing between 48-53 percent chance of a rate cut, up from only 12 percent prior to the ABS release, sending the Aussie plunging more than one U.S. cent. The Australian dollar was trading at 76.11 U.S. cents at the Asian close on Wednesday, down from 77.66 U.S. cents just before the 1130 AEST release.

"Faced with this new lower inflation forecast, it now seems likely that the bank's board will vote in May to take the opportunity to provide some slight further assistance to the Australian economy," economists at the National Australia Bank said as they revised their rate forecast.

WEAK CPI MAY NOT DEMAND RBA RATE CUT

Commonwealth Bank of Australia chief economist Michael Blythe told Xinhua, however, that looking at the CPI only gives a different impression than what the overall Australian economic activity data shows.

"The sort of big price falls we're seeing is something you'd expect in an economy that's in recession," Blythe said.

"Well, we're clearly a long way from that outcome."

Australian Q4 GDP printed at three precent year-on-year vs. 2.5 percent expected, unemployment is trending lower to 5.7 percent and business conditions remain upbeat.

That begs the question, does there actually need any assistance for the real economy, Blythe said.

Australia's central bank has said the inflation metric is not a hard target, but an on-average point over the course of the cycle.

As such, it's likely the bank will revise the target slightly lower, but how far is key if growth is revised up and unemployment lowered.

"It's an interesting mix of forces at work here," Blythe said, adding it will be one of the toughest policy meetings for the board next week.

Stevens has continually noted low inflation gives scope for easier policy, but has remained reluctant for further easing, instead encouraging fiscal policy reform.

"The wild card here is the budget, with a lot of speculation we may see an infrastructure package ... that's something Stevens has been pointing to something that's needed," Blythe said.

"If we were to get that, perhaps again it lowers the need for a rate cut as we get support from the fiscal side."

The budget however is due to be released just hours after the RBA's board meets.

RBA TO WAIT UNTIL Q2 INFLATION PRINT

Market analysts are suggesting the central bank will likely wait until the Q2 inflation print is released in July, but will take a much more dovish stance in the accompanying statement to its policy decision to jawbone the local unit and spur inflation.

The Australian dollar has been under pressure since the CPI release, and is likely to be further weighed by a recovering greenback from an expected hawkish U.S. Federal Reserve monetary statement following the Federal Open Market Committee (FOMC) meeting tonight.

A lower Australian dollar falling back into the RBA's comfort zone, between 70-75 U.S. cents, it will also lend support to inflation.

The risk to holding in May however could be taken as sign only a drastic downturn would trigger a rate cut, which could push the local unit even higher, leading to more jawboning and price action.

The Australian economy has faired well over the past 10-years with uninterrupted growth, largely due Stevens "doing the right thing" at the helm, and there is no reason to suggest he won't keep doing that.

"The last time we had inflation running at these sort of rates was back in 1997/98 and for most of that period, six out of seven quarters of below target inflation, the RBA did nothing," Blythe said.

"(But) the question is what is the right thing for the economy?" Endit