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Weak CPI gives RBA room to cut rates


The Reserve Bank of Australia has plenty of room to cut interest rates again after official figures showed inflation remains near the bottom of its target range.

But the central bank is widely expected to keep the cash rate on hold at its February board meeting.

Australia's consumer price index (CPI) rose just 0.2 per cent in the final three months of 2012, to be up 2.2 per cent for the year, figures released by the Australian Bureau of Statistics on Wednesday show.

Underlying inflation was at 0.55 per cent for the December quarter and 2.3 per cent for the year.

The biggest price rises of the quarter were in the communication and insurance and financial services sectors but these were offset by falls in the cost of healthcare, furniture and food and drinks.

The RBA has a target range for annual inflation of two to three per cent and economists say the latest figures mean it has plenty of room to cut interest rates if necessary.

"On the back of these numbers the odds of a rate cut have gone up a little bit," JP Morgan Australia chief economist Stephen Walters 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."

But many economists think the RBA will keep the cash rate on hold at its February 5 meeting.

RBC Capital Markets senior economist Su-Lin Ong expects the RBA to wait until April 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.

She said the RBA will want to see how the economy fares over the next few months.

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

The RBA cut the cash rate a quarter of a percentage point in December to 3.0 per cent and has delivered 1.75 percentage points in cuts since November 2011

Futures markets have priced in only a 35 per cent chance of a February rate cut, but expect up to two more 0.25 percentage point cuts by the middle of 2013.

But CommSec economist Savanth Sebastian said recent signs of improvement in both the domestic and global economies mean the RBA may not feel the need to cut again.

"While the Reserve Bank will debate another rate cut at the February board meeting, the recent improvement in the global economic outlook, rising share markets, healthy house prices and improving confidence levels may stay board members' hands," he said.