Subdued inflation figure could pave way for further cash rate cuts
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 that 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.
This was because "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 reported the consumer price index rose 0.2% for the quarter and 2.2% over the year, with underlying inflation 0.6% for the quarter. That puts inflation at the lower end of the Reserve Bank's target band, which matters to investors because lower inflation can increase the likelihood of interest-rate cuts and influence asset prices, currencies and borrowing costs.
Not necessarily. Economists said the benign inflation reading gives the RBA scope to cut if needed, but many — including ANZ's Riki Polygenis and UBS analysts — warned there is no definitive "smoking gun" forcing a February cut. The RBA will weigh other indicators of economic activity before acting.
Credit Suisse data showed markets put the probability of a February rate cut at about 39%. Markets have also priced in roughly another 50 basis points of rate cuts for 2013, which would take the cash rate down to around 2.5%.
Economists highlighted that the RBA will focus on more critical releases such as capital expenditure expectations for 2014 and the next labour force report, both scheduled after the RBA's February meeting. These indicators speak to business investment and labour-market conditions.
Following the data, the Australian dollar slipped about a quarter of a cent and traded around US$1.0540 (about 5pm). The share market largely looked through the softer inflation data, with the S&P/ASX 200 closing at 4,787.8 points — a 20‑month high for the week.
The Bureau of Statistics figures showed private-sector wages rose 3.7% in the year to the third quarter of 2012, outpacing headline inflation. Economists noted this wage growth could raise concerns about the nation's productivity even as inflation remains contained.
The Australian National Retailers' Association urged a February easing because retailers reported a reasonably flat Christmas, remained in "heavy discount mode" and expect the first quarter to be slow. They argued a rate cut could help convince consumers to emerge from saving and spend more, supporting retail sales.
UBS economists noted several factors that make near-term cuts less likely: the RBA's existing easing cycle (175 basis points of cuts since October 2011), improving global economic news from the US, Europe and China, and rising commodity prices — all of which reduce the urgency for further immediate rate easing.
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