Slow inflation pace sparks debate among experts regarding rate cut

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With inflation in Australia at its slowest pace in 17 years, experts debate on whether the data is weak enough to trigger an interest rate cut next week.

Some economists argue that the next board meeting of the Reserve Bank next Tuesday might see the official rates fall to a record low of 1.5 per cent. A rate cut would feed quickly into lower mortgage and business lending rates in the hope of sparking stronger demand across the economy and reversing inflationary trends. A continuous slowdown in inflation may pose bigger challenges over time.

However, the view that a rate cut may happen next week is far from unanimous, with bets falling from 70 per cent at the start of the week to only 50 per cent.

According to Westpac chief economist Bill Evans, the inflation report was “still consistent with a rate cut next week,” though he acknowledges that the RBA might hold it off if there was a “fundamental philosophical resistance to cutting.”

On the other hand, AMP Capital head of investment strategy and chief economist Shane Oliver believes that the inflation figures are not low enough to ensure a rate cut.

“We expect that the RBA will move again to help ensure that inflation expectations do not become entrenched below two per cent as has been the case in several other countries,” he said.

Still, other economists surmise that the RBA might delay the rate cut until the November board meeting.

“We now push our forecast for a 25-basis-point cut out to November RBA meeting,” said Citi senior economist Josh Williamson. “We expect underlying inflation to dip again and international developments and the prospects of monetary easing elsewhere will place more upside on the currency.”

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