Inflation benign, rate cut possible

Inflation remains comfortably within the official two to three per cent target band, removing a key barrier to an interest rate cut when the central bank holds its first board meeting of the year on February 5.

The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) rose by just 0.2 per cent in the December quarter, which was half what economists expected.

This was a sharp slowdown down from the 1.4 per cent jump in the September quarter, and left the annual inflation rate at 2.2 per cent.

Rise and falls

The bureau said the most significant price falls during the December quarter were a 5.7 per cent decline in vegetables, a 4.3 per cent drop in audio, visual and computing equipment and a 3.5 per cent easing in pharmaceutical products.

These were offset by a 6.2 per cent increase in domestic holiday travel and accommodation prices, a 2.6 per cent rise in petrol and a 0.8 per cent lift in rents.

Underlying measures of inflation - the trimmed mean and the weighted median - and crucial to the interest rate outlook, were also more subdued than economists had expected.

They grew by an average 0.55 per cent in the December quarter, for an annual rate of 2.3 per cent.

Rate cut coming?

Weaker-than-expected inflation data released on Wednesday has given the Reserve Bank of Australia increased scope to cut the official interest rate when it meets in February.

The consumer price index (CPI), a key measure of inflation, rose 0.2 per cent in the December quarter, after rising by 1.4 per cent in the September quarter, the Australian Bureau of Statistics said on Wednesday.

In the year to December, the CPI rose 2.2 per cent.

An AAP survey of 15 economists had predicted a rise by 0.5 per cent in the December quarter for an annual rate of 2.5 per cent.

CommSec economist Savanth Sebastian said the data removed one hurdle from a potential rate cut decision.

"It highlights that inflation is well and truly contained," he said.

"It leaves the RBA decision in February open, as they have the opportunity to cut rates if they deem it necessary.

"It now comes down to whether they think the Australian economy is improving at a healthy rate."

JP Morgan Australia chief economist Stephen Walters said the figures showed both CPI and underlying inflation remained in the lower half of the RBA's target range of two to three per cent.

He said the weaker inflation figures made a February rate cut more likely.

"On the back of these numbers the odds of a rate cut have gone up a little bit," he said.

"It's not enough to argue that the RBA has to cut the cash rate at the first opportunity, but if they think it is necessary, which is debatable, then they have certainly got an excuse with this inflation data."

RBC Capital Markets senior economist Su-Lin Ong said the RBA was likely to wait for further information before deciding to cut again.

"We think maybe they will wait for a bit more data, given they cut by 50 basis points late last year," she said.

"But these figures clearly give the RBA scope for further interest rate cuts if growth disappoints, which we think it will."

Futures markets are currently pricing in around a 35 per cent chance of a rate cut in February, but have priced in another two cuts in 2013.

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