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Weak inflation raises chance of rate cut
Will low inflation figures influence the RBA’s decision on another interest rate cut? Chris Zappone reports.
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Another interest rate cut next month remains the odds-on favourite after tumbling food prices sent Australia’s headline inflation rate to its lowest level since the depths of the global financial crisis.
Consumer prices were unchanged in the three months to December following a 0.6 per cent rise in the third quarter of 2011, according to data released by the Australian Bureau of Statistics today. The market had anticipated a 0.2 per cent increase.
The December quarter reading is the lowest since the final three months of 2008. At an annual rate, the headline CPI figure came in at 3.1 per cent, its lowest in four quarters and less than the 3.3 per cent economists had tipped.
HSBC economist Paul Bloxham said the spur for a Reserve Bank interest rate cut next month would be a weaker jobs market and the worsening economic situation offshore.
Falling prices for fruit and vegetables have pushed inflation lower.
“We think the RBA will cut interest rates next month because the inflation numbers today were low enough to allow them to do that,” Mr Bloxham said. “But the key reason for cutting rates will be the softening labour market and the global slowdown.”
The dollar initially fell a third of a US cent before bouncing back above the $US1.05 level as traders factored in how the data could influence next month’s rates decision.
What it means for rates
While the weak headline inflation numbers point to weakening price pressures, the RBA will sift through the flurry of figures when making its own call on whether to slice interest rates next month for a third consecutive meeting.
Its preferred gauge technically, the average of the trimmed mean and weighted median inflation figures actually crept higher last month to 2.6 per cent, more than the 2.4 per cent rate economists had been tipping.
Even so, that rate remains well within the RBAs target of 2-3 per cent over time and so wont by itself preclude an RBA rate cut on February 7.
“The half year is telling me that annualised underline rate is still rising comfortably within if not below the 2-3 percent band and over the year maybe around the 2.5 per cent mark,” said David de Garis, senior economist, National Australia Bank.
RBC Capital Market senior economist Su-Lin Ong said the result was in line with a recovery in fruit production easing produce prices in the market.
Core inflation is giving (the RBA) the scope to lower rates, said Ms Ong. Its consistent with further modest easing (in rates).
The dollar
The Australian dollar recovered an early drop to be about a 0.4 of one US cent higher after the release of weaker-than-expected consumer price index data.
Rochford Capital currency director Derek Mumford said the increase in the central bank’s annual trimmed mean gauge has investors speculating that the RBAs rate cutting cycle may take a break soon.
That would suggest that in the short term interest rates can come down but perhaps the RBA will be less keen to cut rates sharply.”
There may be a cut on February 7, said Mr Mumford, but after that the RBA may wait to see what the trend of inflation is.
Financial markets are rating the prospect of a rate cut next month as about a four-in-five chance. Investors continue to predict the RBA’s cash rate will since to 3.5 per cent by June – implying three typical quarter-point rate cuts by then.
‘Not surprising’
JP Morgan economist Ben Jarman said the drop in consumer prices in the final quarter of 2011 wasnt surprising given easing food price pressures.
Fruit prices dropped 13.4 per cent in the quarter, while vegetable prices fell 5 per cent. Pharmaceutical prices sank 5.6 per cent.
However, the core measure was “nearly as expected”, said Mr Jarman. Trimmed mean inflation was 0.6 per cent in the December quarter, rising from a revised 0.4 per cent in the third quarter. The weighted median was 0.5 per cent in the December quarter, rising from a revised 0.4 per cent in the previous quarter.
Thats a middle of the range outcome. We think the RBA will cut in February but its really a balanced call, he said.
The RBA, responding to worries about a possible downturn in the global economy linked to the European crisis, cut interest rates in November and December last year.
with Reuters
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