Australian Inflation Falls to -0.2% in Q1

Australian dollar rattled by inflation report as headline prices unexpectedly fell last quarter.

The consumer price index which measures inflation rate contracted 0.2 percent quarter-on-quarter, down from 0.4 percent from the previous quarter. This is the first decline since the final quarter of 2008.

Traders reportedly tripled their bets on a rate cut at the central bank’s Tuesday meeting to 50 percent as pressure mounts on Governor Glenn Stevens to resume easing from the current record-low 2 percent after a year-long hiatus.

In the first quarter of this year, Australian dollar surged more than 5 percent, impeding efforts to rebalance the economy in favour of service industries like education and tourism.

“A pre-emptive May cut is surely now a real possibility,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “At the latest, an August cut is now inevitable. That spells the end of this three-month old Australian dollar rebound, and the downtrend can now resume in earnest.”

The Australian dollar plunged following the data and traded at 76.18 U.S. cents at 5.10 p.m. in Sydney from 77.41 cents.

Traders are pricing in a 50-50 chance of a rate cut on Tuesday, up from 14 percent on Tuesday.

“An inflation-targeting bank like the RBA can’t ignore such a big undershoot of underlying inflation,” said Paul Dales, chief economist for Australia and New Zealand at Capital Economics.