Rate cut more likely in November – Courier Mail 11-8-08

THE Reserve Bank’s concerns about high inflation in the near-term would make an interest rate cut in November more likely than next month, economists say.

The central bank’s quarterly statement on monetary policy, released today, said consumer price index (CPI) inflation was likely to rise in the second half of 2008 and peak at†5 per cent in the December quarter.

“CPI inflation is expected to be higher in the short term, at around 5 per cent in the December quarter, reflecting the effects of higher petrol prices and the recent correction to estimates of financial services inflation, before declining thereafter,” the RBA said.

Front-month crude oil rocketed to a record $US147 a barrel in early July, but has declined steadily since and sits at about $US115 a barrel now.

The RBA was bearish on economic growth, expecting gross domestic product (GDP) expansion to slow to 2 per cent in the year ended December 2008, down from its forecast of 2.25 per cent made in May.

Lehman Brothers chief economist Stephen Roberts said the RBA’s concerns about high headline inflation made a September interest rate cut less likely.

“A move in November is a likelihood rather than September,” he said.

“There’s still a fair bit of talk of elevated inflation and that suggests they’ll wait for the next CPI before they move.”

Consumer price index data for the September quarter is not due out until October 22.

Mr Roberts said forecasts for high inflation would make a 50 basis points rate cut unlikely.

“The way this statement reads, it’s just a little bit of hosing down how excited the market was getting for a 50 basis point rate cut,” he said.

“It looks like they’ll still be cautious.

“When they do start to cut, it’s more likely to be a smaller cut rather than big cuts.”

CPI inflation was at 1.5 per cent in the June quarter, for an annual rate of 4.5 per cent.

The underlying rate of inflation clocked in at 1.1 per cent in the quarter for an annual rate of 4.4 per cent.

It was the fourth consecutive quarter where underlying inflation came in above the RBA’s target band of between 2 and 3 per cent over the course of the economic cycle.

The RBA still does not expect underlying inflation to fall back to 3 per cent until mid 2010.

Bets on November, February rate cuts

Commonwealth Bank of Australia senior economist John Peters said the RBA’s forecast for slower domestic growth meant rate cuts in November and February are more likely.

“The Reserve Bank’s been pretty clear and lucid in terms of slowing growth and is signalling rate cuts are not too far off,” he said.

“We certainly think we’ll get one in the next few months and certainly by early next year.

“We’re actually saying November, or just within the next three months, and certainly one will be in … by February.”

Last week, CBA was forecasting official rates to remain on hold until the end of 2009.

Mr Peters said that unlike the RBA’s May quarterly statement, the latest statement was more confident about slowing domestic demand.

The RBA cut its forecast for gross domestic product (GDP) to the end of this year and into 2009, as the pace of economic growth slows due to tighter financial conditions, declining asset markets, higher fuel costs and a weaker global economy.

“It’s fairly explicit they’re (the RBA) trying to get a significant slowing in demand and now they see that significant moderation in demand occurring,” Mr Peters said.