Benign CPI may not be a rate-cut trigger
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CANBERRA, Jan 25 AAP
January 25 2013, 1:52PM
Financial markets are yet to be convinced the central bank is about to cut the cash rate again.
This is despite a roll call of generally disappointing economic data since the turn of the year, benign inflation and little sign of a revival in non-mining parts of the economy.
With just over a week to go before the Reserve Bank of Australia (RBA) board gathers on February 5 for its first meeting of the year, markets see just a 30 per cent chance of a 25-basis-point cut in the cash rate to a record low 2.75 per cent.
However, this week's quarterly inflation report clearly leaves the door open for a rate cut should the board believe it necessary.
The December quarter consumer price index (CPI) rose by a mere 0.2 per cent, a sharp recoil from the 1.4 per cent jump posted in the September quarter, keeping the annual rate comfortably in the lower half of the RBA's two to three per cent target band at 2.2 per cent.
The underlying measures of inflation, which have a greater influence on interest-rate policy thinking, were also relatively subdued - averaging an annual rate of 2.3 per cent.
In November, the RBA forecast both CPI and underlying inflation at an annual rate of 2.5 per cent.
Whether or not the price data proves the trigger for an imminent rate cut, TD Securities strategist Alvin Pontoh says it confirms the impact of the introduction of federal Labor's carbon tax last July was a fraction of what was feared.
Beyond outsized utility prices hikes in the September quarter - which he estimates added 0.2 per cent points to CPI and an unexpected rise in dwelling purchase costs - "there has been little or no evidence of further pass-through in the December quarter".
Treasury had estimated the CPI would be 0.7 per cent higher in 2012/13, which the RBA assumed would be spread over the three quarters from the July 1, 2012, start date.
"Given what we now know, that impact could be a fraction of what was estimated, potentially foreshadowing a downgrade to the RBA's near-term inflation forecasts," Pontoh says.
Those forecasts will be included in the central bank's next quarterly monetary statement released on February 8.
But Pontoh does not believe it will provide an automatic trigger for a cut in the cash rate, saying the RBA is more likely to sit back and watch how the data unfolds in coming months.
Most of the domestic data released since January 1 would not have captured the impact of the RBA's last interest rate cut in December.
Even so, the results have been fairly unimpressive.
For example, retail spending in November fell by 0.1 per cent, even after the interest rate cut in October, and the unemployment rate rose to 5.4 per cent in December.
While consumer confidence did rise in January, it still only marginally favours optimists over pessimists, despite 175 basis points of official interest rate cuts since November 2011.
Industry surveys this week continued in a similar vein.
Master Builders Australia's (MBA) national survey of building and construction reported a deterioration in sales, profitability and activity in the December quarter, with respondents saying they expect to reduce workforces in the period ahead.
"The Reserve Bank has pointed to the building industry to help boost the non-mining sectors of the economy, but this does not look likely unless macroeconomic policy becomes more accommodating," MBA chief economist Peter Jones said.
Those sentiments were backed by Housing Industry Association (HIA) data revealing residential land sales tumbled 17.8 per cent in the September quarter.
HIA chief economist Harley Dale said this signals a "rocky road" for any home building recovery in 2013.
Separately, the Australian Chamber of Commerce and Industry's (ACCI) latest business survey showed firms' intentions to invest sank to the lowest level in 15 years against the backdrop of a strong Australian dollar and soft growth in non-mining sectors.
The RBA has been hoping the non-resource industries would take up the slack as the mining and associated investment boom comes off the boil.
"That's not happening at the moment," ACCI chief economist Greg Evans said.
"This builds a strong case for the need for further interest rate cuts."
The managing director of the 1300HomeLoan network, John Kolenda, was more blunt, saying the RBA should cut the cash rate by a full percentage point in the first half of the year, having taken the rate to 4.75 per cent in 2010.
"The high Australian dollar, which has hurt our exporters and the domestic tourism industry, is a legacy of the inept decisions of the RBA," Kolenda says.
By Colin Brinsden, AAP Economics Correspondent