No case for an interest-rate cut by the Reserve Bank of Australia

THE spectre of deflation seems to have stirred up Australia's financial industry. As soon as word was out that the March quarter figures showed that headline inflation fell by 0.2 per cent, a clamour began for a monetary stimulus. The consensus among the industry-linked economists seems to be that there is room for an interest-rate cut of up to 0.5 per cent and the Reserve Bank of Australia should act as soon as possible, perhaps as early as today (May 3) when it holds its regular board meeting.

The core annual inflation rate, after removing or re-weighting volatile items such as fuel, was estimated at 1.55 per cent, below the bottom of the central bank's target inflation rate range of 2-3 per cent on average over the economic cycle. The conventional wisdom is that in a situation when prices are falling (or stagnant), both consumers and investors would hold off spending. This drying up of demand and the withholding of capital expenditure spell a danger for the economy. So immediate action is necessary, it is argued.

However, the biggest fall in prices has been in the transport sector and that is almost entirely because fuel prices have come down in line with world oil prices. Since June 2014, world oil prices have stood below US$50 a barrel, after several years when prices stood as high as US$110. So, if anything, Australia, a net oil importer, is enjoying an economic boost. Nor is Australia in any danger of falling into recession. In fact, it has not suffered a technical recession - two consecutive quarters of negative growth - in 24 years. Economic growth has been maintained even through periods of financial turmoil such as the 1997/98 Asian financial crisis and the 2008/2009 global financial crisis. In 2015, Australia enjoyed growth of 3 per cent.