BUSINESS and industry groups believe that latest inflation figures open the door for an interest rate cut when the Reserve Bank of Australia holds its monthly board meeting next week.
While annual consumer price index (CPI) at 3.5 per cent in the September quarter remains above the central bank’s 2 to 3 per cent target band, underlying measures of inflation were extremely subdued.
Underlying inflation measures grew by an average of just 0.3 per cent in the quarter, the slowest pace in nine years, for an annual rate of 2.45 per cent, and below economists’ expectations.
“The subdued inflation result reflects weak demand conditions in the economy and highlights poor trading conditions outside the buoyancy of the mining and its related sectors,” Australian Chamber of Commerce and Industry director of economics Greg Evans said in a statement on Wednesday.
“With many small and medium businesses around the country battling in these conditions, a cut in interest rates would provide much needed impetus to demand.”
He said while the Reserve Bank may still need convincing of the need for a rate cut, the impact of ongoing uncertainty in both Europe and in the US makes easing monetary policy at this time less risky.
Housing Industry Association senior economist Andrew Harvey agreed that the inflation outcome when considered alongside the weakness in the non-resource domestic economy, provides the Reserve Bank significant room to cut rates to ensure the economy is well placed to ride out any further global instability.
Mr Harvey said revised methodology to the CPI by the Australian Bureau of Statistics means that in effect the RBA has been recently targeting an inflation rate of 1.75 to 2.75 per cent rather than its stated rate of two to three per cent.
“This raises fresh questions over the RBA’s retention of a tightening bias over much of 2011, but more importantly it leaves the RBA with plenty of space to cut rates by the end of this year,” Mr Harvey said in a statement.
“What is arguably the most important macroeconomic tool in the economy, monetary policy, has been managed on the basis of data that is well short of the mark. It adds weight to industry’s long-held view that interest rates were taken too high.”
The central bank raise the cash rate to 4.75 per cent last November.