Tuesday, October 21, 2008

Inflation's high. So what?

Australia’s inflation rate is set to hit a long-term high of 5 per cent when the figures are unveiled tomorrow – well beyond the Reserve Bank’s target zone. But the Bank is expected to keep on cutting Australian interest rates regardless.

On Monday both the Commonwealth Bank and the National Australia Bank announced plans to cut their mortgage rates in anticipation of the Reserve Bank’s next move following the lead set by the ANZ Bank on Friday.

The Commonwealth will cut its variable mortgage rates by 0.21 percentage points, the National Australia Bank by 0.20 points, and the ANZ by 0.25 points. Westpac is yet respond.

The key measure of business price inflation, the Producer Price Index, jumped a record 2.0% in the September quarter, and 5.6% over year – the sharpest increase in the decade since the index has been calculated. As a result economists have increased their forecasts for the annual consumer price inflation rate to 5.0%...

...but they say the release of the news on Wednesday won’t worry the Reserve.

“The Bank believes this will be the peak,” said Commonwealth Securities economist Savanth Sebastian. “World oil prices have crumbled and we are facing a global slowdown”.

“The inflation numbers are irrelevant so long as global deleveraging dominates the economic outlook,” said ANZ economist Warren Hogan. “The inflation risks will eventually subside, and indeed in twelve months we might be facing the opposite problem.”

Financial markets expect the Reserve Bank to remain focused on the risk of an economic downturn and are pricing in a 92% probability of a further rate cut of 0.50 points at the Bank’s next board meeting on Melbourne Cup Day.

Such a cut would take standard variable home loan rates below 8%.

Adding to the case for a further interest rate cut is news from China showing that its economic growth rate has slumped below 10%.

At 9%, China’s economic growth rate in the year to September is its weakest in five years.

In Parliament the Prime Minister Mr Rudd said the way that China handled the slump would be important for both and the globe. He said he was heartened by a statement by the Governor of the People’s Bank of China, Zhou Xiaochuan, that China would need to boost its domestic consumption as its exports fell.

Asked how many jobs Australia would lose over the next twelve months the Deputy Prime Minister Julia Gillard said only that the May Budget had forecast and increase in the unemployment rate and that updatged forecasts would be released next month.

The Foreign Minister Stephen Smith said he was waiting on an invitation from the United States to take part in the economic summit proposed by President Bush in the lead up to APEC.

He had told both the US Secretary of State Condoleezza Rice and the French Foreign Minister Bernard Koucher that Australia was keen to attend.

The Governor of the Reserve Bank Glenn Stevens will outline his thinking about the state of the Australian economy in a closely-watched speech in Sydney today.