Thursday, January 26, 2012

RBA free to move. It may not move, but it is now free to move

A dramatic drop in inflation means there’s now nothing to stop the Reserve Bank cutting interest rates when it meets for the first time this year Tuesday week..

Australia’s official rate of inflation fell to 3.1 per cent for the year to December and to zero for the December quarter itself. It’s the first time Australia has recorded no inflation in a quarter since December 2008.

Offsetting increases in the prices of telecommunications, rents and domestic holidays were big falls in the price of fruit; led down by a 46 per cent slide in the price of bananas, and prescription drugs led down the end of the year cut-in of the Pharmaceutical Benefits Scheme safety net.

But even the seasonally-adjusted rate of inflation was low, coming in at just 0.2 per cent for the quarter.

The Reserve Bank’s preferred measures of underlying inflation came in at 0.5 and 0.6 per cent, suggesting price pressure is well within the Bank’s target band.

“Inflation is a dead duck. The Reserve is all but certain to deliver an interest rate cut on February 7,” said Stephen Koukoulas, until last year economic advisor to prime minister Julia Gillard.

“Inflation is simply not a concern, the Bank’s decision in February need pay no heed to the consequences for prices,” said BT Financial Group economist Chris Caton...

But futures traders marked wound back their bets on a February interest rate cut, cutting the implied probability from 84 per cent to 66 per cent. “The underlying inflation figure came in just above the market’s expectations,’’ explained NAB currency strategist Emma Lawson. “That allowed some pricing of the expected cut to be taken out of the market.”

The Reserve Bank itself believes price pressure is firmly in the middle of its 2 to 3 per cent target band - low enough to enable it to cut rates once more but not low enough to compel it to cut.

Tuesday week’s decision will be heavily influenced by developments in Europe and the Bank’s assessment of their implications for the rest of the world.

Treasurer Wayne Swan spoke by telephone to International Monetary Fund chief Christine Lagarde yesterday telling her Australia understood the danger of a new global downturn and pledging support for the her efforts to fight one.

Australia is expected to announce a decision about whether to pledge more money to the IMF at a Group of 20 Finance Ministers’ meeting in February.

Darwin recorded the biggest December quarter fall in the prices of 0.7 per cent. Perth recorded the biggest increase; 0.3 per cent. Sydney prices fell 0.1 per cent, Melbourne prices climbed 0.1 per cent.

Supermarket price wars saw bread prices fall 2.3 per cent over the year to December and milk prices 10.1.

Vegetable prices slipped 3.6 per cent over the year, while fruit prices climbed 24.4 per cent.

Insurance premiums climbed 7.2 per cent, child care charges 8.5 per cent, water and sewerage charges 8.6 per cent and electricity prices 12.2 per cent.

Treasury modelling says water, gas and electricity costs will climb a further 7.9 per cent as a result of the carbon tax to be introduced in July. The Reserve Bank has promised to “look through” such increases in setting rates, acting only on what it believes are other reasons for price increases.

Published in today's SMH and Age


Year to December: 3.1%
December quarter: 0.0%


Bread prices down 2.3%
Major appliances down 4.6%
Electronic goods down 9.8%
Milk prices down 10.1%
Computer software down 18.8%


Insurance premiums 7.2%
Child care charges up 8.5%
Water & sewerage up 8.6%
Electricity prices up 12.2%
Petrol prices up 12.4%

Year to December, ABS 6401.0

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