Low inflation opens door for interest rate cut

A BEAUTIFUL set of inflation numbers has left the door open for another interest rate cut in February.

A BEAUTIFUL set of inflation numbers has left the door open for another interest rate cut in February.

CommSec economist Savanth Sebastian said the Consumer Price Index - the main measure of inflation in Australia - rose by 0.2% in the December quarter, below expectations for a lift of about 0.4% and 2.2% higher for the year.

However, 1300HomeLoan managing director John Kolenda said the Reserve Bank of Australia needed to bring the official cash rate down by as much as a full percentage point from the current level of 3.0% in the first half of the year, to help boost confidence.

Mr Sebastian said inflation was well and truly contained and the RBA had the scope to cut interest rates in February, if it believed it was necessary.

"The low inflation result removes any lasting hurdle for the RBA to cut interest rates over the next few months," he said.

"Inflation is not an issue at present, meaning that rates can stay lower for longer."

Mr Sebastian said the RBA was the envy of central banks around the globe.

"In Australia, inflation is contained, unemployment is low, the economy is growing close to a 'normal' rate and there hasn't been a recession for 21 years," he said.

"In short, the Reserve Bank's wall of worry is decidedly empty.

"Not only was the headline inflation rate virtually flat but the closely watched underlying measures also recorded decidedly subdued readings. In addition, annualised underlying inflation has fallen to the lower end of the RBA's 2 - 3% target band."

Mr Sebastian said it was likely the producer price data released in early February would confirm businesses continued to absorb costs, while passing on the savings, to get consumers to spend.

And given the ongoing strength of the dollar, he said it was difficult to believe inflation would be a problem in the coming year.

"In the latest result, even imported inflation looks well contained, with the tradables component posting a sizable 0.4% quarterly decrease - a result that should provide the RBA with an additional level of comfort," he said.

And while the RBA would debate another rate cut at the February board meeting on Tuesday, the recent improvement in the global economic outlook, rising share markets, healthy house prices and improved confidence levels could stay board members' hands.

Mr Sebastian said recent commentary from the RBA highlighted interest rates were already below "normal" levels and the central bank was unlikely to want rates to get too far from normal, unless conditions took a drastic turn for the worse.

"The one caveat to that is the strength of the Australian dollar," he said.

"The Aussie currency continues to track higher, having a detrimental impact on exports. CommSec expects the Reserve Bank to keep interest rates on hold in February."

Meanwhile, Mr Kolenda said a survey of the company's brokers on economic concerns for 2013 found 24% were most worried about further falls in the real estate sector.

China's economy going off the boil was a cause for concern, as well as rising unemployment. Mr Kolenda said the RBA would play a key role in the direction of the domestic economy in 2013.

"Even though the RBA lowered the cash rate by 125 basis points during 2012, it wasn't enough," he said.

"As they had taken the cash rate up too high to 4.75% in 2010."

He said the high Australian dollar was a legacy of the RBA's decisions and had hurt exporters, as well as the domestic tourism industry.

CPI changes: The most significant price rises this quarter were for domestic holiday travel and accommodation (+6.2%), petrol (+2.6%) and rent (+0.8%).

The most significant price falls this quarter were for vegetables (-5.7%), audio, visual and computing equipment (-4.3%) and pharmaceutical products (-3.5%).

Originally published as Low inflation opens door for interest rate cut