On the eve of the Reserve Bank of Australia's (RBA) final board meeting of the year, a wide-ranging spread of economic reports suggest inflation remains tame, while Wednesday's national accounts should post a solid rate of growth.
But a senior economist at one of the nation's major banks believes worries over Europe and the global economy will more likely dominate Tuesday's meeting, and determine whether the RBA can sit still on interest rates until the board meets again in February.
"Whilst the domestic data is holding up relatively well, escalating global risks suggest a further pre-emptive rate cut from the RBA would be prudent at the current time," ANZ's head of Australian economics Katie Dean said.
She expects the RBA to cut the cash rate by 25 basis points to 4.25 per cent, following on from the decrease from 4.75 per cent in November, its first reduction in two and a half years.
Bookies are certainly backing this view - a surge of money on a rate cut in the past few days caused Centrebet to narrow its odds to $1.55 from $2.10.
Odds on a 50 basis point rate cut also narrowed to $7 from $8.50, while the odds on rates holding steady have blown out to $2.47.
Inflation is unlikely to stand in the way of a 25 basis point rate cut that would reduce repayments on an average $300,000 home loan by just under $50 per month, assuming that retail banks pass on an official rate reduction in full to their customers.
The TD Securities-Melbourne Institute inflation gauge for November fell 0.1 per cent, helping to drag the annual rate down to 2.1 per cent, from 2.6 per cent in the 12 months to October.
Still, TD Securities head of Asia-Pacific research Annette Beacher is urging the central bank to hold fire on rates until the new year for fear of its impact being lost in volatile and unstable global financial markets.
"Instead, the RBA is in a strong position to voice an easing bias this week, but not deliver another 25 basis point cash rate cut until early 2012 to start the new year with truly neutral monetary policy for whatever lies ahead," she said.
Further key components for the September quarter national accounts were released, including a larger than expected 4.8 per cent increase in company gross operating profits to a record $71.3 billion, of which over third was contributed by the mining industry.
Economists expect the economy would have grown by around one per cent in the September quarter, although they will fine-tune their forecasts when the balance of payments and government finance data are released on Tuesday.
The data also indicated business inventories - stock on shelves and in warehouses - unexpectedly fell 1.1 per cent, cutting around a percentage point from growth in the quarter.
"The declines in inventories were centred on the wholesale and retail sector, which fits the macroeconomic backdrop and concern over household spending following a turbulent (September quarter) for most households' equity portfolios," RBC Capital Markets strategist Michael Turner said.
Weakened business confidence is also being reflected in subdued hiring intentions, with the latest ANZ job advertisements series showing the number of ads in November being unchanged from the previous month, and just 0.2 per cent higher than a year earlier.
Share
