Inflation points to rate cut need

TUESDAY'S benign inflation figures strongly support the Reserve Bank of Australia cutting the cash rate when it meets next Tuesday, according to the Real Estate Institute of Queensland.

The trimmed mean - the measure used by the Reserve - increased 0.3 per cent in March.

Annual inflation was 2.2%.

Most economists had forecasted an underlying inflation figure for the March quarter of about 0.6% per cent.

In fact, many believed that anything less than 0.8% could result in a rate reduction next week.

REIQ CEO Anton Kardash said the inflation result was a further sign that the economy is in need of an immediate pick-me-up.

"Tuesday's figures confirm that inflation is obviously well within the Reserve's target band of two to three per cent," he said.

"The producer price index yesterday fell 0.3% when most economists had predicted a rise of 0.5% and the Reserve itself is starting to question the reasoning behind recent rate hikes by lenders.

"All of these signs point to an economy that is certainly not firing on all cylinders, a fact the Reserve noted in its April meeting when it lowered its expectation for growth.

"The Reserve must act next week and must act decisively."

With the recent independent rate increases by lenders, the gap between the cash rate and the average variable rate is now 3.15 percentage points - the largest margin for nearly 20 years.

Mr Kardash said the Reserve must act to rewind some of the unjustified increases by lenders, which would also support the burgeoning recovery of the Queensland property market.

"It's unfortunate that the major lenders insist on achieving profit margins more in tune with the good times rather the current economy reality," he said.

"In this game of cat and mouse that lenders seem to play with the Reserve and their own customers when the central bank reduces the cash rate, the Reserve must now take back some control and reduce rates by at least 50 basis points on Tuesday."

Topics:  cash rate, inflation, interest rates, mortgages, property, rba, reiq




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