RBA might cut cash rates as prices fall

By Your Mortgage
Falling prices across the country might prompt the Reserve Bank of Australia to cut rates to its lowest since the mid-1950s in a bid to prevent an outbreak of deflation. Just a quarter percentage point cut in rates would slice $43 a month from repayments on a $300,000 mortgage.

According to the Australian Bureau of Statistics, prices fell 0.2 per cent in the March quarter, taking annual inflation to 1.3 per cent. The biggest fall in prices was experienced in Perth, where prices declined 0.6 per cent over the quarter.

When it comes to housing, the cost of buying a new home in Perth also decreased by 2.2 per cent. Perth also experienced the biggest fall in rates at 4.4 per cent over the past year. This could be attributed to the end of the mining construction boom, which has yet to bottom.

The fall in prices was also driven by a 10 per cent decline in petrol prices and an 11 per cent decrease in fruit prices. However, there is also downward pressure on the economy.

Measures of underlying inflation fell to their lowest level on record, which is about 1.5 per cent. This is below the Reserve Bank's inflation target and opens up the possibility for a deflation outbreak, which could create a huge problem for the economy.

According to CommSec economist Savanth Sebastian, there would be concerns inside the reserve about the direction of inflation. "CommSec believes there is a strong chance the Reserve Bank will cut the cash rate to a historical low of 1.75 per cent in May," he said.