Odds shortening on further rate cut in February

Another official interest rate cut is looking more likely as new evidence shows price pressures are easing.

Prices paid by business grew at their slowest pace in a year in the final three months of 2011, new figures on Monday showed, underpinning hopes that an all-important inflation report due later this week will be even softer than forecast.

If the consumer price index (CPI) data for the December quarter play out as expected, it will leave the door open for another interest rate cut when the Reserve Bank of Australia (RBA) board holds its first meeting of the year on February 7.

Prime Minister Julia Gillard believes the central bank has scope to cut interest rates after two reductions in late 2011, despite a slowdown in the economies of Europe and the United States.

“International confidence in our economy and our budget discipline gives the Reserve Bank room to ease monetary policy as they see fit,” Ms Gillard wrote in an opinion piece published in The Australian newspaper on Monday.

Ms Gillard said that, while Australia wasn’t immune from the negative consequences of the economic burdens being shouldered by Europe and the US, its economy would remain the “envy of the world”.

Deloitte Access Economics director Chris Richardson agrees Australia could achieve solid growth this year, given that Queensland coal production is still bouncing back from the floods a year ago and the broader mining sector shows “magnificent momentum”.

But the outlook depends very much on how Europe shapes up.
Mr Richardson said that if the “sticky tape” holding Europe and the euro together remains intact, Australia will have a better year than people realise.

“If it doesn’t, we probably tip back into a global financial crisis,” he told Sky News.

For Australia that would mean unemployment going up, company profits going down, and the federal government’s predicted budget surplus in 2012/13 disappearing fast.

But Australia would not necessarily dip into recession, Mr Richardson said, because of the momentum in mining.

The Australian Bureau of Statistics’ December quarter producer price index (PPI), released on Monday, showed prices in the final stage of production grew by just 0.3 per cent, less than the 0.4 per cent predicted by economists, and featured a drop of nearly 22 per cent in agriculture prices.

The annual PPI was 2.9 per cent, which was within the RBA’s two to three per cent inflation target band, suggesting price pressures were benign.

RBC Capital Markets strategist Michael Turner said the PPI components that correlate best with CPI inflation recorded modest falls and, along with the fall in food prices, that suggested some downside risk to the CPI report due on Wednesday.

While there is a lack of direct correlation between the PPI and key underlying inflation measures, “benign pipeline price pressures nonetheless may offer some marginal support for the 25 basis point cut we continue to expect,” he added.

Forecasts centre on a quarterly CPI rise of 0.2 per cent for an annual rate of 3.3 per cent, according to an AAP survey of 12 economists.

Underlying measures of inflation are expected to grow 0.6 per cent in the quarter and 2.5 per cent over the year.

(article from realestate.com.au)