Interest rates could be cut again as soon as next month, throwing a wildcard into the election campaign, after the Reserve Bank released dramatically lower inflation forecasts, predicting price growth would remain below the bank's target band up to 2018.
As the government talks up its budget theme of "jobs and growth" and predicts higher living standards from its company tax cuts, the RBA is becoming increasingly concerned about the risks of low inflation.
Housing affordability is a key theme of the election, likely to be called on Sunday, although unlike other years, it is driven not so much by the cost of money as by the rocketing cost of housing in the major cities.
Combined with the cuts announced this week, a second downward move would take a further $85 off the monthly cost of servicing a $300,000 mortgage. That could fuel price pressures in the market, locking more aspiring first home owners out.
It will also add interest to the debate between Labor and the Coalition over the former's plans to limit negative gearing to new housing from July 2017.
Prime Minister Malcolm Turnbull is expected to visit the Governor-General Sir Peter Cosgrove on Sunday afternoon to have the July 2 date signed off for a full double dissolution election.
It follows this week's generally well-received federal budget, which had at its centrepiece a massive 10-year cut to corporate taxes, which will be opposed by Labor.
That decision has freed up the opposition to allocate those funds for other purposes including its ambitious Gonski school education pledge costing $37.3 billion over the next decade.
The government goes into the eight-week campaign fractionally ahead, with a more popular leader, and with a strong numerical advantage in the House of Representatives. Labor would need to hold all of its 55 seats and pick up another 21 to form a majority in its own right.
On Friday the central bank slashed its 2016 inflation forecast from 2.5 per cent to 1.5 per cent and cut its 2017 and 2018 forecasts from 2.5 to 2 per cent.
The dire inflation trajectory came as the Turnbull government relented under sustained pressure, instructing Treasury Secretary John Fraser to release his department's estimates of the 10-year cost in foregone revenue, of the budget's proposed company tax cuts.
Mr Fraser told a Senate committee it had been modelled to cost $48.2 billion by the end of the 10-year period.
The Reserve Bank's inflation downgrades already presume at least one more cut in the official cash rate, taking it to an unheard of 1.5 per cent, and opening up the possibility of one more after that, making it just 1.25 per cent.
"The size of the downgrades is arguably unprecedented," said UBS economist George Tharenou. "The bank now expects underlying inflation to be below or at the bottom of its target range for three years, an unprecedented miss."
BetaShares chief economist David Bassanese said there was "little reason why the bank need wait". It could cut at its next meeting on June 7, in the middle of the eight-week election campaign.
"If so, this would not be the first time the bank had changed rates during an election campaign," he said. "It raised rates during the 2007 campaign, and cut interest rates during the 2013 campaign."
ANZ economist Felicity Emmett said the size of the downgrade meant an immediate second cut. On balance she thought the bank would wait until August, but a June move "shouldn't be completely discounted".
A cut to a cash rate of 1.5 per cent would take the standard discounted variable mortgage rate to 4.35 per cent, the lowest in records dating back to the 1950s.
Politically the cut would be a bonus for the government, even though it would be a vote of concern about historically low inflation - and pale growth - rather than a vote of confidence in the budget.
The Australian dollar dipped below US74¢ on the move, having slipped from US76.6¢ on budget day.
Calculations by SGS Economics and Planning suggest the cash rate would have to slide to 0.5 per cent to head off deflation in Adelaide and regional Queensland, 0.75 per cent to prevent deflation in regional Victoria and Perth, and would need to climb to 3.5 per cent and 2 per cent to restrain inflation in Sydney and Melbourne.
SGS head of economic analysis Terry Rawnsley said the economic landscape was complex and almost impossible for the Reserve Bank to manage with just one instrument.
Revealing the $48.2 billion cost of the government's "enterprise tax cuts", for business, a task given to him on Thursday at "around 6pm" by the Treasurer after the government was hammered over withholding the figure, Mr Fraser warned: "These costings have considerable uncertainty attached to them."
"You've finally been dragged kicking and screaming to fess up," said Labor's Senate leader Penny Wong.
On Thursday, Mr Turnbull refused to provide the figure during an awkward interview with Sky News, and during sustained questioning from Labor in Parliament.
The $48.2 billion calculation does not include the 10-year cost of lifting the upper threshold of the 32.5¢ tax bracket to $87,000 from $80,000. That was estimated to cost $4 billion over the four-year forward estimates.
With Michael Koziol
