Subdued inflation gives the Reserve Bank room to move on rates
The consumer price index, a measure of prices paid by consumers for commonly bought items, rose 0.2 per cent for the quarter and 2.2 per cent for the year, at the lower end of the Reserve Bank's annual target band, and slightly below economists' expectations.
Underlying inflation was 0.6 per cent for the quarter, data from the Bureau of Statistics showed.
"Inflation is well and truly contained and the Reserve Bank certainly has the scope to cut interest rates in February if it believes it is necessary," Commonwealth Securities economist Savanth Sebastian said.
Significantly, the Bureau of Statistics figures show wages growth outpacing inflation, with private sector wages in the year to the third quarter of 2012 rising 3.7 per cent - an increase tipped to fuel concerns over the nation's rate of productivity.
ANZ senior economist Riki Polygenis said despite the subdued rate of inflation, she did not expect the Reserve Bank to cut rates at its next meeting as "inflation has taken somewhat of a back seat to other concerns about economic activity at the moment".
"We think the more critical releases for the RBA will be the [capital expenditure] expectations for 2014 and the next labour force report, both due after the RBA meeting in February."
UBS economists Scott Haslem and George Tharenou said several other factors, including the RBA's easing cycle, which has seen it cut rates by 175 basis points since October 2011, positive economic news from the US, Europe and China and improving commodity prices meant the central bank was less likely to act in the short-term.
"[There's] no smoking gun for more near-term rate cuts," they said.
Financial markets' expectations of an interest rate cut in February stood at 39 per cent, Credit Suisse data showed. The market has priced in another 50 basis points of rate cuts for 2013, taking the cash rate to 2.5 per cent.
The Australian National Retailers' Association called for a February easing, saying that retailers remained in "heavy discount mode" to attract customers.
"Retailers have reported a reasonably flat Christmas and the first quarter of any year is traditionally very slow. Retailers will be looking for all the help they can get to convince Australians that it's safe to emerge from their savings bunker and spend again," association chief executive Margy Osmond said.
The Australian dollar slipped a quarter of a cent following the data release, and traded around $US1.0540 about 5pm on Wednesday.
The Australian share market looked through the softer data, with the S&P/ASX 200 Index closing at 4787.8 points - another 20-month high for the week.
Economists said the high Australian dollar was also starting to keep inflation well contained.
Frequently Asked Questions about this Article…
The Bureau of Statistics showed the consumer price index rose 0.2% for the December quarter and 2.2% for the year, which sits at the lower end of the Reserve Bank's target band. For investors, a benign CPI print reduces near-term inflation risk and can influence expectations about future RBA interest rate moves and asset prices.
Underlying inflation was 0.6% for the quarter, while private sector wages rose 3.7% year-on-year to the third quarter of 2012. Economists highlight that wages outpacing inflation can be a concern for productivity but also means inflation is contained now — giving the RBA scope to cut rates further if economic conditions warrant it.
The article shows mixed views: Commonwealth Securities economist Savanth Sebastian said the RBA has scope to cut in February if necessary, but ANZ senior economist Riki Polygenis did not expect a February cut because other economic activity concerns are weighing more heavily. Markets placed about a 39% chance of a February cut according to Credit Suisse data.
Since October 2011 the RBA had cut rates by 175 basis points. Financial markets had priced in another 50 basis points of rate cuts for 2013, which would take the cash rate down to around 2.5% if those cuts occurred.
UBS economists Scott Haslem and George Tharenou noted factors such as the RBA's existing easing cycle, improving economic news from the US, Europe and China, and recovering commodity prices. These positives reduce the immediate case for more near-term cuts — hence ‘no smoking gun’ for additional action.
The Australian National Retailers' Association urged a February easing, saying many retailers stayed in 'heavy discount mode' after a flat Christmas and slow first quarter. Retailers argue lower rates could encourage Australians to spend rather than remain in a 'savings bunker', helping retail sales.
Following the CPI release the Australian dollar slipped about a quarter of a cent and traded around US$1.0540. The share market largely looked through the softer data, with the S&P/ASX 200 Index closing at 4787.8 points — a 20-month high for the week.
Economists in the article said the RBA will be watching capital expenditure expectations for 2014 and the next labour force report, both of which are scheduled after the February meeting and could be more influential than the recent inflation print in shaping policy decisions.
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