Australia’s recent soft inflation figures are giving the central bank hope that they can delay an increase in the official cash rate, anticipated by financial markets in the near future. The Reserve Bank of Australia (RBA) left the cash rate unchanged at a record low of 1.5% at the start of November and is expected to keep it on hold for at least the next month, following months of weak inflation figures.

What Do these Inflation Figures Show?

The Australian Bureau of Statistics (ABS) released the Consumer Price Index (CPI) for the third quarter of 2018 which showed a rise of 0.4% on the quarter and 2.2% on the year. This was both lower than the RBA’s quarterly and annual estimates of 0.5% and 2.3% respectively. The core CPI, which excludes volatile price items, came in at 0.4% for the quarter and 1.8% for the year. This was also lower than the RBA’s quarterly and annual estimates of 0.6% and 2.25%, respectively.

Why is Low Inflation a Positive Factor?

Lower than expected inflation is often viewed as a positive sign by the RBA, as it keeps prices and wages in check and avoids deflation. Inflation is an important measure of economic activity in the country and when it is weak, businesses may not be able to pass on price increases. This ultimately leads to a slowdown in the domestic economy and could put pressure on the RBA to take further stimulus measures.

Who Does the Low Inflation Rate Benefit?

The low inflation rate is a major benefit to consumers, as it allows them to keep more of their money instead of being hurt by higher prices. A low inflation rate also benefits businesses, as it allows them to retain their cost advantages and reduce their costs, thereby improving their profitability. The RBA’s decision to keep interest rates on hold also benefits borrowers, as it maintains low cost of borrowing for those who need to secure credit.

What Effects Have the Low Inflation Figures Had on the Economy?

The recent low inflation figures have already had a tangible effect on the Australian economy. With price changes staying subdued, consumer demand has been boosted which has then led to increased purchasing power and higher consumer spending. This has had a knock-on effect on business confidence, as firms become more willing to invest in production and employment.

Additionally, with the weak inflation readings allowing firms to reduce their costs and remain competitive, we have seen an increasing number of firms taking advantage of the situation to reduce prices. This has resulted in a what economists call ‘a disinflationary environment’, whereby producers become entrenched in a lower-cost environment and become reluctant to increase prices.

What Measures has the RBA Taken Due to the Low Inflation Figures?

The RBA has already taken steps to try and stimulate inflation, with the help of some policy support.

These measures include:

• Cutting the cash rate to a record low of 1.5%
• Releasing $32 billion of government bonds to provide funding support to the ‘big four’ banks
• Introducing a new low-rate loan program in order to help stimulate lending
• Increasing the amount of cash in the banking system by removing the minimum deposit requirement
• Adjusting the pipeline of priority house building investment to ease property market pressure

These measures are all aimed at helping to stimulate economic growth and encourage greater levels of spending and investment. The RBA’s policies are intended to ensure that the country remains competitive and solvent, and the nation’s rate of inflation remains close to what is considered to be its ‘target range’ of 2-3%.

What Does the Future Hold for Inflation in Australia?

Overall, the outlook for inflation in Australia remains positive, as the low inflation figures send out a signal of stability and low risk for businesses and investors alike. This means that firms have the confidence to invest and expand, enabling economic growth and jobs creation. Crucially, the RBA still has some room to move the official cash rate further downwards, should inflation weaken further and the economy needs more support.

The RBA’s decision to keep rates on hold following the release of the soft inflation figures is seen as a positive step in ensuring that the Australian economy continues to grow without inflating prices to unmanageable levels. The recent policy support measures will help to cushion any potential downturns in the economy while giving businesses the confidence to invest. This in turn should encourage greater levels of spending and lending and, altogether, lead to a more prosperous future for the country.