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Inflation may remain subdued: data

New data suggests Australia's benign inflation profile will be around for a while yet, leaving scope for further interest rate cuts as and when needed.

But financial markets doubt that muted price pressures on their own will be enough to result in an interest rate cut when the Reserve Bank of Australia (RBA) holds its first board meeting of the year on Tuesday.

On Friday, markets were pricing in less than a 20 per cent chance of a cut in the cash rate from three per cent to an all-time low of 2.75 per cent.

The producer price index, that measures the cost changes of raw materials for business, rose just 0.2 per cent at the final stage of production in the December quarter for an annual rate of 1.0 per cent, well below the RBA's two to three per cent inflation target band.

"Today's report is further confirmation that inflation poses no barrier to further policy easing if judged necessary, but we believe the RBA will sit tight for now and assess the incoming data flow," TD Securities strategist Alvin Pontoh said in a note to clients.

But retailers believe not only should the central bank be cutting the cash rate to 2.5 per cent, banks should be passing on more than full official reduction.

"It's clear interest rates in Australia are comparatively high compared to (rates) internationally due to the greed of banks who have not set interest rates relative to their borrowing costs," Australian Retailers Association executive director Russell Zimmerman said in a statement.

While Tuesday's meeting will be the immediate focus for RBA governor Glenn Stevens, the surprise calling of a September 14 federal election has thrown up questions about his future.

The governor's seven-year tenure in the top job is due to end just days after the election, complicating the appointment process.

Treasurer Wayne Swan said he would be talking to the governor about what he wants to do.

But opposition finance spokesman Andrew Robb said while the central banker had performed "quite admirably" he believed any appointment should be delayed because the election day announcement puts the government in some sort of caretaker mode.

"Normally these sorts of things in an election campaign would be put off until there is clarity about who is going to form the next government, and I think that should apply in this case as well," Mr Robb said.

Other data on Friday showed manufacturing had a sluggish start to the year with little sign of successive interest rate reductions turning conditions around.

The Australian Industry Group's (Ai Group) manufacturing index was down 4.1 points to 40.2 in January, well under the key 50-point mark that separates growth from contraction.

"The well-entrenched pressures that have been confronting the manufacturing sector for several years are being compounded by a slowing in the broader economy," Ai Group chief executive Innes Willox said.

Opposition industry spokeswoman Sophie Mirabella said the government had failed to deliver any policy vision for Australian manufacturing.

"All it has delivered is discussions, round-tables, forums and an endless talkfest," she said in a statement.