Inflation surges, but rate cut still on the agenda

A spike in inflation for the September 2008 quarter is unlikely to stop the Reserve Bank from cutting interest rates when it meets next month.

According to the consumer price index data released by the Australian Bureau of Statistics on Wednesday this week, inflation surged 1.2 per cent in the third quarter. This result took annual inflation to 5 per cent in the September quarter, which is a level well above the Reserve Bank’s 2 to 3 per cent inflation target. It is also the largest annual change since the December quarter in 1995.

The strength of the inflation data means that the chances of a large rate cut in November are now dim. Some market participants had been predicting up to a 50 to 75 basis point cut at the RBA board meeting on November 4. The prospect of a 25 point cut in November and another 25 point cut in December now seems a much more likely scenario.

Although this CPI figure was higher than expected and the Government’s recently announced $10.4 billion spending plan is likely to stimulate domestic consumer spending, the RBA is unlikely to stop cutting rates. According to the Reserve Bank, inflation is likely to remain high in the short term before slowing in 2009. Governor Glenn Stevens and his team have probably already parked inflation as an agenda item and are now more focused on stopping the economy from stalling and slipping into recession.

The RBA voted on October 7 to drop the official cash rate from 7 per cent to 6 per cent, which is the first one percentage point interest rate cut since May 1992. According to the RBA minutes which were released this week: "The key factors for members’ consideration were the sharply worsening conditions in international financial markets during September and the consequential deterioration in the global economic outlook."

Infochoice.com.au