Flat Australian inflation stokes rate-cut hopes

By Amy Coopes, AFP

SYDNEY–Australian inflation held steady in the fourth quarter, data showed Wednesday, a lower-than-expected result that stoked hopes for an interest rate cut to boost a “quite sluggish” economy. The Consumer Price Index was flat in the three months to December from the previous quarter, and 3.1 percent in 2011, the Australian Bureau of Statistics (ABS) said. Analysts had forecast a 0.2 percent and 3.3 percent rate respectively.

The figures were proof that price pressures were in check and a third rate cut in as many months was on the cards, analysts said. “I think it is a done deal now that the Reserve Bank will cut rates,” said CommSec economist Savanth Sebastian. “The Australian economy has been quite sluggish, global growth forecasts have been cut and I think the Reserve Bank will take out a little bit more insurance in these volatile times.” The Reserve Bank of Australia (RBA) cut the official interest rate — currently at 4.25 percent — by 25 basis points in both November and December. Spikes in the price of holiday travel and accommodation, beer and petrol were offset by a fall in medicines, vegetables and a steep 13.4 percent slump in fruit prices as the banana industry bounced back from wild weather in 2011. Top-strength Cyclone Yasi wiped out most of Australia’s banana crop last February, and the ABS said prices for the fruit had fallen 46 percent in the December quarter as solid supplies came back online. Treasurer Wayne Swan welcomed the data as “more evidence of Australia’s strong economic fundamentals” and said it left ample room for rate cuts. “With underlying inflation sitting squarely in the RBA’s target band, it does create room for further interest rate cuts into the future,” Swan told reporters. Macquarie senior economist Brian Redican said Australia’s lower-than-expected inflation boosted the case for further easing in February amid shaky global conditions due to Europe’s debt woes. The central bank does not meet in January. “With inflation this well contained, they can take out more insurance about the weakening global outlook,” Redican said. “We have seen the Australian dollar re-strengthen over the last month, and that’s putting more pressure on areas like manufacturing, so I think the rationale for the RBA will be to help support the domestic economy,” he added. The Australian dollar initially slipped on the news but rebounded strongly as underlying inflation — a measure which strips out volatile items such as food and fuel and is closely watched by the RBA — overshot forecasts. Core inflation came in at 0.6 percent for the quarter and 2.6 for the full year, ahead of a 0.5 percent and 2.4 percent forecast but well within the central bank’s 2.0-3.0 percent target range. The Australian dollar had jumped to US$1.0506 from US$1.0466 immediately prior to the data, pricing in the chance of a rates pause to rein in core inflation.