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Soft Australian inflation boosts rate cut hope

Australian banknotes in various denominations are arranged for a photograph in Sydney, Australia, on Monday, May 24, 2010.

[SYDNEY] Australian came in at a lower-than-expected 0.5 per cent in the September quarter, official figures showed Wednesday, boosting hopes that the central bank will cut interest rates next week.

The Consumer Price Index (CPI) reading follows a 0.7 per cent increase in the three months to June and brings the rise through the year to 1.5 per cent, the Australian Bureau of Statistics (ABS) said.

Shane Oliver, chief economist at AMP Capital, said underlying inflation was 2.15 per cent year-on-year, putting it at the lower of end the Reserve Bank of Australia's target range of 2.0-3.0 per cent and therefore increasing the chance of a rate cut.

"The fact that inflation is lower than expected and below target despite a 20 per cent plus fall in the value of the Australian dollar over the last year adds to the case for the RBA to cut the cash rate again," he said in a note.

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"I continue to expect the RBA to cut the cash rate by 0.25 per cent when it meets next week or if not then, then sometime in the next few months." The RBA last lowered rates to the historic low of 2.0 per cent in May and is seen as comfortable with the fall in the Australian dollar as it adjusts to significant declines in key commodity prices with a decade-long mining boom unwinding.

Expectations had been for a CPI rise of 0.7 per cent for the quarter and 1.7 per cent year-on-year, and Capital Economics chief Australia and New Zealand economist Paul Dales agreed that the surprisingly weak data boosted the rate cut argument.

"Looking ahead, we suspect that the effects of the weaker economic climate will limit the boost to inflation from the lower dollar and will start to weigh on domestically generated inflation too," he said.

"If we are right in expecting underlying inflation to fall below the 2.0-3.0 per cent target range, then the RBA will have little choice but to take interest rates down to 1.5 per cent." The ABS said the biggest rises over the quarter were in the cost of overseas holidays (up 4.6 per cent), fruit (8.2 per cent) and property (4.6 per cent). These were partially offset by falls in vegetables (down 5.9 per cent) and smaller drops in the price of telecom services and petrol.



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