• Australia’s cash rate, at 1.5%, sits at the lowest level on record. Many suspect the RBA will cut rates again in the not too distant future.
• Despite the cash rate being reduced by 575 basis points since the GFC, average annual inflation over the past five years has grown at the slowest pace in 55-years.
• In the year to March, inflation grew by 1.3%. Underlying inflation was not much stronger at 1.42%.
• The RBA will announce its next interest rate decision on May 7. Markets put the probability of a 25 basis point cut at just under 50%.

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If you think a rate cut or two from the RBA will suddenly boost Australian inflationary pressures, here’s a statistic from Commsec that provides some food for thought.

Despite the RBA reducing Australia’s cash rate from 7.25% to a record-low of 1.5% over the past decade, it calculates that average annual inflation over the past five years grew at the slowest pace in 55-years.

Yes, at just 1.74%, annual inflation hasn’t been this weak since 1963.

The chart below from Commsec tells the story.

While inflation has been weak over recent years, it was even weaker over the past 12 months.

From the March quarter last year, consumer price inflation grew by a paltry 1.3%, according to the ABS. Underlying inflation, which removes the effects of volatile price movements such as food and fuel, wasn’t much stronger at 1.42%, the equal-lowest level on record.

The latter is now moving away, not towards, the RBA’s 2-3% medium-term target.

Whether measured in headline or underlying terms, inflation, already weak, got even weaker.

Despite the less than convincing track record for rate cute being able to spur on inflationary pressures, markets, and most economists, are convinced the RBA will ease monetary policy settings again — potentially as soon as next week — to stimulate economic activity and curb the risk of Australia falling into a deflationary spiral that will do little to encourage spending or investment, nor make debt servicing any easier.

A rate cut may do the trick to help spur on a sustained lift in inflation, but with the cash rate already sitting at record lows, and with fiscal stimulus still limited at this point, it’s easy to see why some are now talking about the prospect of the RBA having to adopt non-conventional measures to achieve its policy objectives.

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