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Inflation risks as RBA set to cut interest rates

Discussion in 'The Economy' started by Billv, 3rd Oct, 2008.

  1. Billv

    Billv Getting there

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    INFLATION picked up in September and remains above 4 per cent on an annual basis for the eighth month in a row, a private survey shows.

    But economists still expect the Reserve Bank to cut interest rates next week in an effort to ease the credit squeeze and provide a cushion in a slowing economy.

    All 19 economists surveyed by AAP tipped an official rate cut on October 7, with 11 forecasting a reduction of half a percentage point.

    A bigger-than-usual cut to the 7 per cent cash rate would be the first half-point easing since April 2001, as the economy slowed in the wake of the tech crash.

    A rate cut in next week, on the heels of last month's move, would be the first back-to-back rate cut since the September 2001 terror attacks in the United States.

    Investors expect the recent sharp falls in commodity prices to ease inflation pressures, although the slide in the Australian dollar is complicating the outlook.

    The TD Securities-Melbourne Institute inflation gauge found headline inflation rose by 0.4 per cent in September, compared with a 0.1 per cent increase in August.

    In the 12 months to September, headline inflation rose by 4.5 per cent, compared with 4.2 per cent in the 12 months to August, the survey said.

    TD Securities senior strategist Joshua Williamson said inflation pressures remained elevated in September due to the falling Australian dollar and despite a slowing domestic economy and softer commodity prices.

    “The inflation problem now confronting policy makers is apparent in the fact that not since May 2005 has inflation been below the middle of the RBA's target range,” Mr Williamson said in a statement.

    Prices rose in 32 expenditure groups and fell in 12, with the September increase mainly due to price rises for fuel, rents, and fruit and vegetables, the survey said.

    In underlying terms, the gauge's measure of trimmed mean inflation - which strips out volatile items - rose 0.4 per cent in September, following an increase of 0.2 per cent in August.

    In the year to September, the gauge found underlying inflation rose by 3.9 per cent, down from 4.3 per cent the previous month.

    The central bank focus is on the underlying measures of inflation - the weighted median and the trimmed mean.

    The RBA wants inflation to return to its target band of between 2-3 per cent.

    Mr Williamson said continuing high inflation suggested the cash rate would stay at 7 per cent, but the RBA was likely to cut by 25 basis points due to the credit squeeze.

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    Inflation risks as RBA set to cut interest rates | The Australian