Odds of rate cut rise on soft inflation

01a.Odds of rate cut rise on soft inflation

By Lucy Hughes Jones


(Australian Associated Press)

Tame inflation has dramatically increased the chances of a Melbourne Cup day rate cut.

The consumer price index rose 0.5 per cent in the September quarter for an annual rate of 1.5 per cent, and has now been below the Reserve Bank’s target band of two to three per cent for a year.

The market is now betting on a two in three chance of a cut to the official cash rate at the RBA board’s November meeting next week, up from around one third on Tuesday.

AMP Capital chief economist Shane Oliver said inflation is lower than expected despite a more than 20 per cent fall in the value of the Australian dollar during the past year.

“(This) adds to the case for the RBA to cut the cash rate again in order to offset the potential negative impact on the economy of big bank mortgage rate hikes,” he said.

Dr Oliver expects a 0.25 basis point cut to the cash rate in November to a record low of 1.75 per cent.

“The bottom line is that pricing power remains very weak reflecting constrained growth in retail sales and cautious consumer confidence,” he said.

BetaShares chief economist David Bassanese said the inflation numbers on their own won’t compel the central bank to cut, but they give the RBA flexibility to move should consumer confidence take a hit from impending mortgage interest rate hikes by all four big banks.

“That’s going to take more time for them to assess,” he said.

The softness of the economy and subdued wages growth had more than offset any inflation impetus from a weaker Australian dollar, Mr Bassanese said.

JP Morgan economist Tom Kennedy says the figures will prompt closer consideration of a rate cut when the RBA meets next Tuesday, though he expects no move.

But he said it’s now a closer call because the central bank may need to trim its inflation forecasts.

“Typically when they do that, they do a rethink on the economy and in the past we’ve seen them ease when they’ve lowered inflation.”

Mr Kennedy said weak price pressure was broad-based, with falling prices for petrol, vegetables and dairy products.

Underlying inflation, which strips out volatile price movements, was also weaker than expected, with a quarterly rise of 0.3 per cent delivering an annual rate of 2.15 per cent.


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