Rate cut on cards despite higher inflation

24 Oct 2012, 3:40 pm   -   Source: AAP

Markets and economists still expect a cut to the RBA's cash rate in November, despite a rise in inflation in the September quarter.

An interest rate cut is still an odds-on bet for Melbourne Cup Day, despite a bigger-than-expected jump in inflation in the September quarter.

The consumer price index (CPI) rose 1.4 per cent in the three months to September, the Australian Bureau of Statistics said on Wednesday.

It was the first measure of inflation released since the July 1 introduction of the federal government's carbon tax, which led to a jump in electricity and gas prices.

Compared to the same time last year, CPI was two per cent higher.

However the underlying measures of inflation, which exclude the more volatile price changes, reveal annual CPI growth of 2.5 per cent.

That puts it in the middle of the Reserve Bank of Australia's target range for annual inflation of two to three per cent, giving it room to cut the cash rate when it meets on Melbourne Cup Day (November 6).

The RBA cut the cash rate by a quarter per cent at its October board meeting to 3.25 per cent.

The underperforming retail sector seized on the inflation data to call on the RBA to stimulate the economy through a rate cut.

"To save the family budget, particularly at the high stress time of Christmas, the RBA needs to take the pressure off by reducing the cash rate," Australian National Retailers Association chief executive Margy Osmond said.

CommSec economist Savanth Sebastian did not believe the inflation figures would deter the RBA from cutting the cash rate in November.

"I don't think it's going to shift the Reserve Bank's position when it comes to rates, we're still expecting a rate cut on Melbourne Cup Day," he said.

However, JP Morgan economist Tom Kennedy said the stronger inflation numbers, could lead the RBA to keep rates on hold for a month.

"They might move in December, rather than November," he said.

Futures markets are pricing in a 60 per cent chance the RBA will cut the cash rate a quarter per cent to three per cent in November, down from an 85 per cent chance on Monday, though a rate cut by the end of 2012 is fully priced in.

Mr Kennedy said it appeared the carbon tax had contributed to the faster-than-expected rise in inflation, particularly through a jump in electricity and gas prices, which rose 15.3 per cent and 14.2 per cent respectively in the quarter.

The other major price increases in the quarter were fruit and vegetables, which rose 10.2 per cent.

However the impact of the carbon tax is well below that of the introduction of the GST in 2000, which saw CPI jump 3.7 per cent in the three months to September that year.

Shadow Treasurer Joe Hockey said the electricity price hikes were hurting Australian families.

"Electricity is the most important infrastructure everyday Australians have and the price is just going to keep going up, and up and up," he said.

However, Treasurer Wayne Swan said Wednesday's data showed remained under control.

"There is nothing in today's figures that suggest any evidence of a significant broad-based price increase due to the impact of the carbon price," he said.

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