22/04/2009 - 09:56

CPI lift rules out rate cut: economists

22/04/2009 - 09:56

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The rise in Australia's underlying inflation rate rules out a near term interest rate cut, economists say.

CPI lift rules out rate cut: economists

The rise in Australia's underlying inflation rate rules out a near term interest rate cut, economists say.

Latest figures from the Australian Bureau of Statistics show that alternative measures of underlying inflation rose between 1 and 1.2 per cent in the March quarter with the trimmed mean consumer price index (CPI) rising 1.0 per cent, for an annual growth rate of 3.9 per cent.

The weighted median CPI rose 1.2 per cent in the March quarter, with an annual rise of 4.4 per cent.

Market economists had expected the average of the two underlying measures to rise by 0.8 per cent in the March quarter for an annual rate of 3.9 per cent.

Meanwhile the headline inflation rate rose 0.1 in March quarter for an annual rate of 2.5 per cent.

The market consensus for the headline CPI was for a rise of 0.5 per cent in the March quarter, for an annual pace of 2.9 per cent. The Reserve Bank targets an annual inflation rate of betwen 2 and 3 per cent.

ICAP economist Adam Carr said the rise meant the Reserve Bank of Australia (RBA) would hold off on a rate cut for the next few months.

"The trims and the weighted median are both one per cent plus," he said.

"For an economy that's slowing we really should be seeing core inflation going in the other direction."

"I don't think it will spark alarm bells, but in my view it rules out a near term rate cut."

In April the RBA cut interest rates top 3 per cent, a 49 year low.

The ABS calculates the trimmed mean and weighted median measures on behalf of the RBA, which uses them to gauge the underlying trend in inflation.

Unlike the headline CPI, the RBA's underlying measures are subject to revision due to the seasonal adjustment of some of their components.

UBS senior economist Matthew Johnson said: "I think the RBA still have confidence that things will come down in due course," he said.

"It's not going to encourage them to cut rates any faster."

"The last thing the central bank wants is for inflation to be too high when recovery starts.

"This number definitely tells me they will be on hold for a little while."

ANZ senior economist Katie Dean said higher than expected core inflation presented a mixed bag for markets.

"In terms of headline numbers, they were brought down significantly by a few very large movements in one off items," he said.

"They weren't necessarily evidence of disinflation.

"It was a mixed bag for markets."

She said markets would price out a rate cut in May because of the rise, but rate cuts down the track were still a possibility.

"It doesn't stand in the way of further interest rate cuts," she said.

"But the fact that core inflation is still stubbornly high in the short term won't be a concern to the RBA, who are more forward looking.

"We're confident that as domestic demand eases, inflation will continue to ease from here."

RBC Capital Markets senior economist, Su-Lin Ong, said the high rate of underlying inflation exerted broad pressure on prices and would ease in time.

In monetary policy, the RBA's focus is on the underlying measures of inflation - the weighted median and the trimmed mean - which exclude volatile prices from CPI calculations.

Underlying inflation rose 1.1 per cent in the March quarter for an annual pace of 4.15 per cent, down from a yearly rate of 4.35 per cent for the December quarter.

The central bank's target band for underlying inflation is two to three per cent.

"The emerging slack in both the goods and labour markets as Australia sinks into recession will take some time to exert more broadbased downward pressure on prices, but we continue to expect core inflation to move lower over the next 18 months," Ms Ong said.

"Indeed, it is likely to be back in the RBA's target range by late 2009/early 2010."

Ms Ong said the higher than expected rate for underlying inflation would not have significant meaning for monetary policy.

"At the margin, it supports our base case view that the RBA may pause for breath over the next few months and that we may not be too far from the end of this easing cycle," she said.

"Nevertheless, the improving core inflation outlook, rapidly rising unemployment rate, and still challenging global backdrop suggests that the risk remains skewed towards further modest cuts later in 2009.

"We retain a 2.5 per cent terminal cash rate."

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