Thursday, October 28, 2010

Ring the tills. Steady rates, low prices, so many more consumers...

Retailers are facing the prospect of their best Christmas in years after a surprise dip in inflation all but removed the prospect of a pre-Christmas rate hike.

The high dollar and the breaking of the drought kept kept consumer price inflation down to just 0.7 per cent in the September quarter, with the Reserve Bank's preferred measure of so-called underlying inflation inching ahead a mere 0.55 per cent -- one of the lowest rates in five years.

Reserve Bank staff had been keen to push up rates, inserting into the minutes of each of the last two board meetings the unusual warning that "interest rates would need to rise at some point" if their forecasts came to pass.

The unexpectedly low inflation rate raises the possibility the Bank will instead revise down its forecasts when it issues an update next week.

The figures show Australia's annual and underlying inflation rates chugging along at 2.8 per cent and 2.4 per cent, both down on previous rates and within the Bank's 2 to 3 target band...

Treasurer Wayne Swan said while the setting of rates was a matter "entirely for the independent Reserve Bank" its most watched measure of inflation had fallen to the middle of its target band.

"Reserve Bank staff have elegantly painted themselves into a corner," said Credit Suisse consultant Sean Keane. "The inflation figure leaves the rate gun not only smokeless, but looking rusty and unusable. Both the trajectory and the absolute level of inflation would make it a challenge to hike."

The Aussie dollar slid more than one US cent on the news and frenzied futures trading pushed down the implied probability a Melbourne Cup day rate hike from a 45 per cent chance to a 14 per cent.

The prices imply no rate hike until at least February when the Reserve Bank will meet again armed with December quarter inflation data.

Boosting Christmas trading further will be low prices brought on by the higher dollar and an the extra 209,000 Australians now earning incomes as a result of the surge in employment since January.

The consumer price figures show the price of petrol down 3.7 per cent and electronic goods 2.7 per cent in the quarter as a result of the high dollar. The breaking of the drought helped push down the price of vegetables 5.4 per cent and the price of bread 0.8 per cent.

Working the other way were exceptionally big increases in utility charges including electricity up 6 per cent, water and sewage up 12.8 per cent and property rates up 6.2 per cent.

Sydney electricity prices climbed faster than the national average, jumping 9 per cent, and water rates lower, jumping 7 per cent.

Analysis of the figures shows that had it not been for the electricity and water increases the overall consumer price index would have barely moved.

"The economy appears almost Goldilocks in nature," said RBC Capital Markets economist Su-Lin Ong. "Things may change, but the Reserve Bank has breathing room."

The Coalition and independent Senator Nick Xenophon yesterday pushed for a Senate inquiry into the banks, pressuring them not to widen interest rate margins should the Reserve Bank move. The inquiry would report by March.

Treasurer Wayne Swan ruled out an new financial system inquiry to update the work of the landmark Wallis inquiry of the mid 1990s as proposed by Shadow Treasurer Joe Hockey saying the banks needed time to bed down recent changes.

Published in today's SMH and Age

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