The Reserve Bank of Australia defied market pricing and some economists' forecasts when it opted to sit tight on interest rates at its April policy meeting.
After the February cut, to a record low of 2.25 per cent, many expected a quick follow-on in the bank's bid to stimulate spending and investment and help Australia's economic rebalancing away from resources-related infrastructure investment.
However, a second reduction did not materialise.
Even the chances of a May cut have also softened, the latest market betting shows.
Nonetheless, there remains a hard core of RBA watchers who say a cut at the May meeting is the most likely scenario.
And many of those pundits support their speculation by suggesting the RBA's patience since February owes as much to the timing of March quarter inflation figures as anything else.
The RBA notes in the minutes of its April policy meeting, published on Tuesday, that the board "saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year".
Standard language
This is fairly standard language. Since the advent of inflation targeting by central banks around the world – the RBA started in 1993 – the objective has been to use interest rates to temper price movements and foster sustainable, job-creating economic growth.
By watching that headline inflation does not move outside a 2 per cent to 3 per cent band, and looking beyond the headline figure to underlying measures when needed, the RBA sets a target which helps determine its monetary policy guidance and decision-making.
When input prices – including wages and capital equipment costs – are stable, businesses are more inclined to invest; if consumer price rises remain lower or in line with wage inflation, then consumers are more likely to spend.
When prices start to climb steeply because of tight labour market conditions, energy market shocks, other producer market shocks or imperfections, the imported inflation stoked by a weakening currency, or market and consumer expectations, central banks can put a cap on them by increasing interest rates.
Benign inflation
Conversely, when inflation is benign – as it is around most of the world at present – a central bank can discount this as a reason not to ease monetary policy. It can bring down the cost of capital without fear of fuelling inflation. Exclusions here include the price of certain asset classes such as housing and shares, which can run away when central banks ease policy rates.
However, there is such thing as disinflation, which is when shocks, weak demand, labour market slack, discounting, cost-cutting and cheap capital converge to maintain downward pressure on consumer and input prices.
Disinflation in and of itself is not a negative force until it becomes deflation, where price falls encourage consumers to hang back in the hope of even cheaper goods and services and businesses to hold off investment for that same reason.
Deflation also pushes up the relative cost of debt, adding weight to household, corporate and government obligations.
Deflation has dogged Japan on and off since the 1990s and threatened Europe in recent years. However, it is yet to rear its ugly head in modern Australia and is unlikely to do so.
Consensus forecast
The consensus forecast for first-quarter headline inflation, seasonally adjusted, is 0.1 per cent, compared with 0.2 per cent in the December quarter last year, a Bloomberg survey shows.
This would take the year-on-year rate to 1.3 per cent, compared with 1.7 per cent at the end of December. Although 0.1 per cent is close to what would be considered deflation, the RBA is likely to look through it to underlying inflation because of the impact of low oil prices.
The trimmed mean, for example, which strips out extreme quarter-on-quarter price movements, is expected to come in at 0.6 per cent for the quarter, compared with 0.7 per cent in the last three months of 2014. This would put the year-on-year trimmed mean at 2.2 per cent.
Westpac said in a note that it based its 0.1 per cent forecast for headline CPI on "the collapse in petrol prices through the late fourth quarter and early first quarter, falling fruit and vegetable prices and the usual post-Christmas discounting".
It expects underlying inflation, or the weighted median, at 0.5 per cent for the quarter.
Wage pressure
Another key to low inflation at present is the lack of wage pressure, says National Australia Bank, and this is despite the surprise decline in unemployment in March from 6.2 per cent to 6.1 per cent.
"With the unemployment rate above 6 per cent and rising, and wages growth subdued, there is little upward pressure for core inflation on the horizon," the bank said in a note.
"NAB expects underlying inflation to be running at 2 per cent year-on-year at end 2015."
Westpac chief economist Bill Evans concluded on Tuesday that Wednesday's CPI figures would give the RBA the all-clear to continue cutting interest rates.
"Clearly [the] inflation report will be important in that regard, with our forecast of 0.1 per cent for the headline and 0.5 per cent for the underlying representing no hurdle for cutting rates in the face of the expected growth downgrade," he said.
