Growing confidence that the Reserve Bank will cut interest rates spark a rise in the sharemarket.
FAVOURABLE inflation figures and growing confidence that the Reserve Bank will cut interest rates have sparked a rise in the sharemarket, with investors piling into bank stocks.
The S&P/ASX 200 Index ended the day up 47 points, or 1.1 per cent, to 4271.3 - the highest in six weeks - after figures showed inflation was unchanged over the last three months of 2011.
Market economists said the data cleared the way for the Reserve Bank to cut rates when it met next week.
Many now expect the central bank to cut rates by 0.5 percentage points over the next two months.
But cuts in the official interest rate will not necessarily be passed on to home lending customers, and that would benefit bank earnings.
The dollar ended the day above $US1.05, compared with its previous close of $US1.0497 despite dipping a third of a US cent immediately after the release of the inflation figure.
The big four banks accounted for 53 per cent of the rise in the sharemarket benchmark.
Westpac led the way, climbing 3.5 per cent to $21.30. Commonwealth Bank gained 2.4 per cent to $51, ANZ rose 2.2 per cent and National Australia Bank was up 2 per cent.
Market economists said the Reserve Bank was likely to cut rates next month.
Tumbling food prices sent the headline inflation rate to its lowest since the depths of the global financial crisis.
Consumer prices were unchanged in the December quarter, following a 0.6 per cent rise in the September quarter, according to the Australian Bureau of Statistics. The market expected a 0.2 per cent increase. The Reserve Bank's preferred gauge actually crept higher last month to 2.6 per cent annualised, more than the 2.4 per cent rate economists had tipped.
St George Bank chief economist Besa Deda said the moderate inflation data gave the Reserve room to cut rates at its February 7 meeting.
''The inflation trends evident in the data will allow the door to remain open for further rate cuts from the RBA,'' she said.
''While inflation is important, top of the agenda for the RBA at the moment are global economic developments, especially European ones.''
The big drop in food prices, combined with falls in the cost of clothing and footwear and a fall in health costs, helped keep inflation in the middle of the Reserve's 2-3 per cent target band.
The Bureau of Statistics said large falls in fruit prices - which dropped 13.4 per cent in the quarter - were due mainly to the plummeting price of bananas, which fell 46 per cent in the December quarter as supply increased, following the devastation caused by cyclone Yasi last February.
Pharmaceutical prices sank 5.6 per cent after a larger proportion of consumers exceeded the Pharmaceutical Benefits Scheme safety net than in the September quarter.
Vegetable prices fell 5 per cent, audio-visual equipment dipped 3.4 per cent, and motor vehicles slipped 1.2 per cent.
The biggest price rises were felt by domestic holiday travellers. Costs were up 7.3 per cent. On the other hand, rents crept up 1 per cent and telecommunication equipment rose 1.1 per cent.
A Goldman Sachs report said the Reserve Bank was likely to cut rates by 50 basis points over the next two months.
This was because the big banks would probably fail to pass on in full next month's expected 25-basis-point cut.
''A second rate cut is a 100 per cent certainty and most likely in March,'' the report said. ''This also follows last week's employment growth that was the weakest in 20 years.''
Frequently Asked Questions about this Article…
Why did the Australian sharemarket jump after the latest inflation figures?
Favourable inflation figures raised confidence the Reserve Bank of Australia (RBA) will cut interest rates, which pushed investors into bank stocks and drove the S&P/ASX 200 up 47 points (1.1%) to 4,271.3 — its highest level in six weeks.
Are RBA interest rate cuts now likely, and when could they happen?
Market economists said the inflation data cleared the way for the RBA to cut rates at its next meeting. St George Bank chief economist Besa Deda said the RBA could cut rates at the February 7 meeting, and many now expect cuts over the coming months.
How many basis points of rate cuts are economists and banks forecasting?
Many market economists expect a total of 0.5 percentage points (50 basis points) of cuts over the next two months. A Goldman Sachs report specifically predicted a 50-basis-point reduction over that period, with a first 25-basis-point cut followed by a likely second cut in March.
Will banks pass RBA rate cuts on to mortgage customers?
Not necessarily. The article notes that cuts in the official interest rate may not be fully passed on to home lending customers, and if banks retain some of the reductions that would help boost bank earnings.
Which banks led the recent market rally and how did their shares move?
The big four banks drove much of the gain — they accounted for 53% of the rise in the ASX benchmark. Westpac led, climbing 3.5% to $21.30; Commonwealth Bank rose 2.4% to $51; ANZ gained 2.2%; and National Australia Bank increased about 2%.
What drove the drop in headline inflation to its lowest level since the GFC?
A big fall in food prices was the main cause, including a 13.4% drop in fruit prices driven largely by a 46% plunge in banana prices as supply recovered after Cyclone Yasi. Reductions in clothing and footwear and lower health costs also helped push headline inflation down.
How did other economic indicators respond to the inflation release?
Consumer prices were unchanged in the December quarter (against market expectations of a 0.2% rise), while the RBA’s preferred inflation gauge actually crept higher to 2.6% annualised. The Australian dollar finished the day above US$1.05 despite an immediate dip after the release.
What should everyday investors take away from the inflation news and possible RBA cuts?
The article suggests that expectations of RBA rate cuts can lift the sharemarket — especially bank stocks — and that banks may benefit if they do not fully pass cuts on to borrowers. Everyday investors should watch upcoming RBA decisions, banks’ pricing actions and further inflation updates to understand market direction.
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