Business

Australian inflation slows giving rate cut hopes a lift

  • 24 April 2012
  • From the section Business
Australian dollar notes
Image caption Australia's strong currency has helped ease pricing pressures

Australian inflation has slowed more quickly than expected, boosting optimism of a rate cut next month.

Consumer prices rose by 0.1% in the first three months of the year compared with the previous quarter, the statistical office said.

The annual rate of price growth was 1.6%, well below the 2.1% figure forecast by most analysts.

There have been increasing calls for a rate cut as Australia's economy has slowed, hurt by weaker global demand.

"This just goes on to reaffirm there is little inflationary pressure in the economy and the Reserve Bank of Australia (RBA) remains on course to cut interest rates," said Spiros Papadopoulos of National Australia Bank.

"The RBA will probably wait and see how the economy responds to the rate cut they are likely to put place in May. There is a probability of further cuts based on ongoing weak data down the track."

Going neutral

Currently the main Australian interest rate is at 4.25% after having been raised to help combat quickening inflation.

However in recent months, a number of factors have combined to take the steam out of price growth.

In March Australia released its latest growth figures, which showed that gross domestic product increased by 0.4% in the three months to the end of December. Analysts were expecting growth of 0.8%, and blamed weaker global growth and demand for resources in China.

At the same time, the Australian dollar has remained strong, cutting the price of imported goods such as food and fuel. Many consumers, while continuing to spend, have become more cautious about their outlook for jobs and earnings power.

This now means that the central bank can turn its focus to ensuring continuing and more even growth in Australia, analysts said.

"Monetary policy is tight at the moment and it needs to get to neutral," said Matthew Johnson of UBS. "After that if unemployment rate starts to head up or growth remains weak, they will cut more."

The RBA will meet on 1 May to decide it interest rates.

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